CFO

“The best mentor relationships are

authentic relationships.” Diane Morefield,

EVP and CFO of Strategic Hotels & Resorts

CONCERNS OF SMALL-CAP CFOs

HOW ADP TURNS PAYROLL

INTO CASH

MAY 2013 | WWW.CFO.COM

Weathering Climate Change

Special Report On HR Technology

The Art Of MentoringHow women finance chiefs are preparing tomorrow’s CFOs

WOMEN IN FINANCE

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Getty Images, Neil Webb

34On The Record

Other People’s MoneyPaycheck-processing king ADP

has a lot of spare cash on hand,

and CFO Jan Siegmund knows

what to do with it.

Interview by David McCann

38The Art Of MentoringFive female CFOs tell how mentors

helped them succeed—and

how they are returning the favor.

By Marielle Segarra

42 Female CFOs

in the Fortune 500

The women at the top of

America’s largest companies.

44Weathering The WeatherIn the face of extreme weather

and natural disasters, companies

are reengineering their supply

chains for added reliability.

By Russ Banham

48 Who’ll Stop the Rain?

As extreme-weather events

increase, so do the costs.

FEATURES

WOMEN

IN FINANCE

“I feel a responsi-bility to mentor anybody who wants to be successful in their career.”

Jennifer Hill, CFO of Global Banking and Markets at Bank of America

38

50 Special Report:

Human Resources Technology

Software For The People Baffled by the ever-increasing

variety of HR applications?

Here’s how to choose the right

ones for your company.

By David McCann

May 2013 Volume 29, No. 4

1cfo.com | May 2013 | CFO

Extreme- weather events like the 2011 floods in Thai-land can wreak havoc on sup-ply chains

From top: Mark Stephen/theispot, Getty Images,

Thinkstock, courtesy of Dunham’s Sports

CONTENTS

Up Front4 From the Editor

7 Letters

10 Topline CFOs press for visa reform SEC OKs social media disclosures

the PCAOB proposes a makeover for audit standards FASB gets a

new chairman Excel shortcuts and more.

May 2013 Volume 29, No. 4

58 FIELD NOTES

Perspectives from CFO Research

Where Are Your Travel Dollars Going?Following your company’s travel

expenses is a trip woth taking.

By Matt Surka and Josh Hyatt

By the Numbers

18 | ACCOUNTING & TAX

Profit Shifters Face Global CrackdownA new tax plan from the OECD could eventually hinder multinationals from moving profits overseas.

By Kathleen Hoffelder

Should Your Audit Firm Do Your Taxes?New research shows that investors welcome the double duty. By Kathleen Hoffelder

22 | CAPITAL MARKETS

Do Leaks Pay?In theory, a seller and a buyer can benefit from prematurely disclosing an M&A deal. But the reality can be di-sastrous. By Vincent Ryan

24 | GROWTH COMPANIES

Small Companies May Have To Offer IRAsA new proposal would require small businesses to automatically enroll some workers into individual retire-ment accounts. By David McCann

Will VC Firms Join the Crowd?How crowdfunding and venture capital can coexist. By Marielle Segarra

26 | HUMAN CAPITAL

Execs Prefer Homegrown CFOsA majority of company executives favor internal candidates for the job.

By David McCann

Employee Pay SurgesSalary levels have risen nationwide for four consecutive quarters. By David McCann

32 | STRATEGY

Japan Easing Heightens Yen ExposuresThe Bank of Japan’s more aggressive monetary policy may deepen losses for unhedged U.S. companies. By Vincent Ryan

IMF Criticizes Easy Money PoliciesWhat will happen when central banks pull back on their monetary easing? By Vincent Ryan

26

56 DEEP DIVE

CFO Takes the Pulse of U.S. CFOs

Public KnowledgeFor small-company CFOs, the

rewards of being public don’t

always outweigh the headaches.

By Kate O’Sullivan

24

22

60

2 CFO | May 2013 | cfo.com

60 Take-Away

The Game PlanTo compete with larger sporting goods chains, Dunham’s Sports is stepping up its square footage, says CFO Al Blazek.Interview by Marielle Segarra

CFO, Vol. 29, No. 3 (ISSN 8756-7113), is published 10 times a year, with combined January/February and July/August issues, and distributed to qualified chief financial officers by CFO Publishing LLC, 51 Sleeper St., Boston, MA 02210 (executive and editorial offices). Copyright ©2013, CFO Publishing LLC. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electron-ic, mechanical, photocopying, recording, or otherwise, without the prior permission of CFO Publishing LLC. Requests for reprints and permissions should be directed to FosteReprints, (866) 879-9144; E-mail: jkaletha@fostereprints.com; website: www.fostereprints.com. Subscriptions: U.S. and possessions: 1 year $65; 2 years $100; 3 years $130; foreign, 1 year $120 U.S. funds only. Periodicals postage paid at Boston, MA, and additional mailing offices. POSTMAS-TER: Send address changes to CFO, P.O. Box 1233, Skokie, IL 60076-8233. CFO is a registered trademark of CFO Publishing LLC. SUBSCRIBER SERVICES: To order a subscription or change your address, write to CFO, P.O. Box 1233, Skokie, IL 60076-8233, or call (800) 877-5416; or visit our website at www.cfo.com/subscribe. For questions regarding your subscription, please contact subscription@cfo.com. To order back issues, call (617) 345-9700, ext. 3200. Back issues are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms.

CAPITAL MARKETSCollateralized debt obliga-tions, the securities that brought you the global financial crisis, have returned, with firms like Deutsche Bank issuing CDOs this year. Is it time to be afraid again? To find out, read “CDOs Are Back: Will They Lead to Another Financial Cri-sis?” in Knowledge@Whar-ton, at http://knowledge.wharton.upenn.edu/article.cfm?articleid=3230.

LEADERSHIPCFO’s Corporate Performance Management West conference will be held in San Francisco on June 4–6. On the agenda are sessions on big data, finance transformation, economic val-ue, supply chain analytics and more. For more information, see www3.cfo.com/cpmw13/home.

FROM THEEDITOR

EDITOR’S PICKS

women in the CFO chair, and they want to help younger women, just as they themselves were helped. At the same time, they are equally willing to guide men in their careers. After all, much of the wisdom they have to im-part isn’t gender specific.

Some of a mentor’s best advice may be Zen-like in its simplicity. A mentor, says Karen McLoughlin of Cognizant, “can say something very simple but profound that really makes you think about how you conduct yourself.” Both McLoughlin and Bank of America’s Jennifer Hill still recall gratefully the simple but profound advice their men-tors gave them years ago.

In our other feature story this month, “Weathering the Weather” (page 44), Russ Banham reports on the efforts of companies to come to grips with climate change, particularly as it affects their supply chains through se-vere storms and hurricanes, increased

flooding, rising temperatures, and so on. People may doubt the reality of global warming, but businesses can’t take any chances. That’s why compa-nies like Kimberly-Clark, Royal Carib-bean Cruises, and ATMI are building more redundancy into their supply chains—moving from just-in-time to just-in-case. And according to the Car-bon Disclosure Project, 83% of S&P 500 companies are integrating climate change into their enterprise risk man-agement processes.

Even federal agencies like the De-partment of Defense are planning for the effects of climate change on their operations. When it comes to extreme weather, organizations with far-reach-ing supply chains can no longer afford to just let it be.

Edward TeachExecutive Editor

School’s out this month for many teachers and stu-dents, but education never stops for finance mentors

and mentees. In our cover story on women in finance, “The Art of Mentoring” (page 38), Marielle Segarra profiles five female CFOs for whom mentoring has played a significant role. These finance chiefs are aware of the shortage of

Seeking Words Of Wisdom

4 CFO | May 2013 | cfo.com Kory Addis

CPG • Energy & Utilities • Financial Services • Government • Healthcare • Higher Education • Industrial • Life Sciences &

Pharmaceuticals • Media & Entertainment/Communications • Retail • Tourism, Hospitality & Leisure • Transportation

© 2013 The North Highland Company. All Rights Reserved. North Highland is a registered trademark of The North Highland Company.

northhighland.com/youfirst

CONSULTING

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of wasting time or money

on typical consulting services,

we should talk.

You First.

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Talk to us. Call 1-855-883-7725. Visit ADP.com/cfo to download the free white paper,

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HR. Payroll. Benefits.*ADP is the largest provider of health and welfare benefits services based on the number of clients. (Source: Everest Group)ADP and the ADP logo are registered trademarks of ADP, Inc. Copyright ©2013 ADP, Inc.

Eyes on the EarnoutIn the article “Eyes on the Price” (March), it was very interesting to get different perspectives on CFO strategies in evalu-ating various purchase-price considerations. Specific to the section on hedging the deal, utilizing a contingent-payments strategy, while absolutely important for certain prospective acquisitions, is not appropriate in every situation.

My experience is that the board of directors and operating management are generally strong advocates of an earnout strategy if it is acceptable to the target. However, the future accounting consequences of entering into an ear-

Senior Vice President,

CFO and Treasurer

Cantel Medical

Little Falls, NJ

Tax and ConsequencesGreat tax updates (“The New Tax Landscape,” March). As money leaves the pockets of American consumers, we will definitely see the profitability of small businesses declining. We will not see prolific growth of small busi-nesses as we have seen in the past. This is probably due to the changing financial landscape of our country. Articles such as these are great sourc-es of information to keep up-to-date with the latest changes in the tax code. Great article, CFO.

Johnathon CandelarioVia E-mail

nout are important and can create significant future judgments re-garding achievability of the earnout targets and earnings volatility, as well as other poten-tial accounting com-plexities.

Furthermore, ana-lyst and investor reac-tions to future earnout

adjustments impacting profitability can be mixed. Consequently, the CFO needs to be a voice of reason in en-suring that accounting considerations relative to earnouts are properly evalu-ated and discussed with the entire ac-quisition team as an important part of the deal evaluation.

Craig A. Sheldon

Cover by Evan Kafka

Chief financial officers invariably praise

their finance teams in public, giving them cred-

it for all kinds of accomplishments. That isn’t

surprising; CFOs aren’t known for having CEO-

sized egos, and finance staffers do perform

critical corporate tasks. But in private, CFOs find their staffers wanting, reported David

McCann in “Finance Leaders Bemoan Talent

Shortage” (April 24).

CEB, a research and consulting outfit, inter-

viewed 673 finance managers at 78 global companies, asking

them to rate their direct reports on dozens of technical and

“soft” skills. One result: “finance workers are more skilled in

the areas that have the least positive impact on value cre-

ation.”

Even in those areas, which include the more technical

parts of their jobs—skills that should be regarded as “table

stakes” for finance positions, said CEB senior director Kruti

Bharucha—only 28% of staffers were rated effective by the

CFOs. But when it came to strategic competencies, such as analyzing financial performance in terms of key value drivers, the judgment was far harsher: just 7% were rated effective.

And even fewer, 5%, were considered effective persuaders.

Bharucha told McCann that CEB wasn’t “particularly sur-

prised” that finance chiefs were so dissatisfied with their

staffers. “There is simply a shortage of finance talent avail-able in the market,” she said. “We hear it in every single con-

versation we have with CFOs.” The firm suggests a number

of ways that companies can improve finance recruiting and

employee development.

THE BUZZ ON CFO.COM

LETTERS

7cfo.com | May 2013 | CFO

But CFO.com readers had their own opinions why finance

staffers aren’t up to snuff. “Too many finance organizations

are focused on efficiency and specialization, which leads to

isolation and a narrow view of the function and how it sup-

ports the business,” said one. “Rotations are essential to

broaden employees’ experience, but if management does not challenge our young professionals with projects that allow in-novative thinking, nothing will change.”

Another reader wrote that the stra-

tegic and communicative talents seen

as particularly lacking in finance staff-

ers “are also talents in short supply in every aspect and at every level of every business.” This commenter pinned some

of the blame on management, suggest-

ing ignoble motives at work: “The status

quo—and here I mean middle and upper

management who lack these talents—

have a certain level of comfort where they are. They do not

want to see up-and-coming workers developing the skills

that they lack.”

Indeed, management’s culpability was a common theme.

“The fault, dear Brutus, is not in our [staff] but in ourselves,”

wrote a third reader. “It is noteworthy that, while the article

speaks largely to the deficiencies in the staff resource from

the management perspective, its recommendations speak to

actions which management can and, I would contend, must

take to correct them.” The reader spoke from experience:

Continued on page 8

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EDITOR-IN-CHIEF, CFO.COM

David M. Katz (davidkatz@cfo.com)

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DEPUTY EDITORS, ONLINE/MOBILE:

David McCann (davidmccann@cfo.com)

Vincent Ryan (vincentryan@cfo.com)

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Kathleen Hoffelder (kathleenhoffelder@cfo.com)

Caroline McDonald (carolinemcdonald@cfo.com)

David Rosenbaum (davidrosenbaum@cfo.com)

ASSOCIATE EDITOR

Marielle Segarra (mariellesegarra@cfo.com)

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Taylor Provost (taylorprovost@cfo.com)

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Deana Colucci

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Editorial Advisory BoardDavid W. Devonshire, EVP–EVP/CFO Retired,

CFO, Motorola Inc.

Bruce Edwards, Chairman Emeritus,

Powerwave Technologies Inc.

David E. Farber, The RVH Group, Merrill Lynch

Frank R. Gatti, CFO & SVP, ETS

James C. Johnston, President, Johnston Co.

Stephen Payne, Americas Working Capital Leader,

Ernst & Young LLP

Albert A. Pimentel, CFO & COO, McAfee Inc.

Ellen B. Richstone, Former CFO, Rohr Inc.,

Sonus Networks, and Luminus Devices Inc.

Kenneth J. Sanginario, Founder, Corporate

Value Metrics LLC

Debra Smithart-Oglesby, Former CFO,

First America Automotive

Editorial Offices

CFO

WELCOMES

YOUR

LETTERS

8 CFO | May 2013 | cfo.com

“When I first entered public account-

ing, I had the good fortune of working

with a group of professionals who [had]

the expectation that, if they were to

advance, they must first train me to be

able to take their place.”

Unfortunately, that experience was

the exception, not the rule. “I have

worked for many organizations and in

many cultures since then, but none as

exceptional as that one,” the reader

concluded. “And that is the problem.”

If CFOs perceive their direct reports

as lacking in essential skills, a major-ity of executives say their company’s finance chief is not qualified to take on operating responsibilities. That was the

finding of an exclusive survey done for

CFO by recruiting firm Korn/Ferry, as

reported by McCann in “Many Execs See

CFOs as Poor Operators” (March 25).

Seventy-one percent of the 145 ex-

ecutives surveyed said their compa-

ny’s CFO is involved in running opera-

tions, but 51% thought the finance chief

wasn’t up to the job (12% said “may-

be”). Among the reasons for the skepti-

cism? CFOs lack “the softer people skills needed to come across as an effective COO who is leading and managing an

organization,” conjectured Korn/Ferry’s

Joshua Wimberley.

A couple of readers thought the fi-

nance chief was getting a bum rap for

being a good soldier. “I would be curi-ous to know how many of those CFOs in operational roles have chosen the additional role, as opposed to those on whom the additional role was forced,” said one. A second reader wrote, “At a

former employer I was ‘asked’ to as-

sume the COO role on a temporary

basis,” and while he thought he “did a

decent job, it would not be an additional

role I would choose for myself.”

But a third reader dismissed the

survey results. “I’ve heard all this non-sense before,” he wrote. “I ignored it,

and went on to serve with distinction

as CEO, president, CFO, COO, CIO and

general manager. Never let the preju-

dices of small minds hold you back from

achieving your goals and realizing your

potential.” CFO

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INVESTMENT MANAGEMENT + INVESTMENT SERVICINGTh

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Finance chiefs at small and midsize companies are hoping new immi-gration legislation will help them

compete with larger companies for high-skilled talent. In particular, they say Congress should raise the limit on H-1B vi-sas, which allow companies to employ for-eign workers with specialized skills, such as scientists and software engineers.

The cap on H-1B visas is currently set at 65,000 people per year, with an added exemption for up to 20,000 highly skilled workers with advanced degrees. A Senate bill released April 16 raises the visa cap to 110,000 workers for the first year (plus an increased exemption), with a possible ceil-

ToplineHIRING

STATS OF THE MONTH

-5.7%Fall in durable-goods orders in March. Civilian aircraft (orders fell 48.2%) and defense goods (33.2%) accounted for much of the decrease.

-0.4%Drop in retail sales in March. Depart-ment-store sales fell 1.2%.

76.4Thomson Reuters/University of Michigan Consumer Sentiment Index in April, a three-month low

Sources: Commerce

Department, Thomson

Reuters/University of

Michigan

FALL IN THE SPRING

Finance Chiefs Call For Visa ReformsThe current system favors large companies, say CFOs at smaller firms.

ing of 180,000. Impending legislation in the House of Representatives will likely also propose raising the cap, but it is unclear how high, says Madeleine Sumption, senior poli-cy analyst at the Migration Policy Institute.

Demand for H-1B visas is on the rise. On April 5, for the first time since 2008, the H-1B program hit its cap within five days af-ter the filing period opened. As a result, U.S. Citizenship and Immigration Services used a computerized lottery system of applica-tions to determine which workers got the visas. That means all employers that applied for the visas through April 5, regardless of company size, had an equal chance of se-curing them. But finance chiefs at small and midsize companies say the overall system favors large companies.

Brent McClure, CFO of service contrac-tor Offshore Inland Marine and Oilfield Services, says his company doesn’t have the staff to complete the visa application paper-work before the program hits its cap. While larger companies have workers who special-ize in visa applications, at Offshore Inland the responsibility would fall on McClure. “The [visa] pool is so low that we don’t even bother,” he says. “There’s no point. It would take someone like myself an insurmount-able amount of time.”

Offshore Inland, which has about 250 employees, does not currently sponsor any foreign workers through H-1B visas. But Mc-

Clure says an increase in the visa cap would help the firm compete with larger compa-nies for engineers. “The talent pool would increase, so we would have a better oppor-tunity of [hiring] some of them,” he says.

Thinkstock10 CFO | May 2013 | cfo.com

“The [visa] pool is so low that we don’t even bother.”

Brent McClure, CFO of Offshore Inland Marine and Oilfield Services

tor of the social business practice at Protiviti. “CFOs need to understand that the infrastructure around ap-proval and governance of social media usage is not there,” Hedges says. Com-panies could try to apply governance policies they

have for websites to social media, “but this channel is much more fluid and is po-tentially in the hands of all employees, all appearing to be of-ficial spokespeople,” he says.

Now more than ever, companies need to make sure

they follow social media and communication policies, says Jeremy Mishkin, Internet priva-cy attorney at Montgomery Mc-Cracken. “If I’m a CFO, I need to know not just what’s on my com-pany’s Facebook page or Twitter feeds, but also what my execu-tives’ pages look like, so I don’t have a situation in which a per-son issues a statement that the SEC might view as a material an-nouncement.” TAYLOR PROVOST

investors to its use of the social media channel, its commu-nications could con-stitute selective dis-closure and therefore violate Reg FD rules requiring companies to distribute material information broadly and non-exclusively. The SEC did not name specific social media channels that would be acceptable plat-forms for communications.

The SEC’s Division of Enforce-ment launched its investigation into Netflix and Hastings after the CEO disclosed possible mate-rial information on his personal Facebook page in July 2012.

The announcement is likely to heighten concerns about social media governance within compa-nies, making it more of a priority for risk managers and CFOs, says Greg Hedges, managing direc-

11cfo.com | May 2013 | CFO

Unless Congress raises the visa cap significantly, small and midsize companies may see little benefit from reform, says Sumption. “If there were so many visas that they were available almost all year, that would mean that the system would be open for the smaller employers year round,” she says. “But if you had only a slight increase in the visas, it doesn’t seem like it would necessarily change things.”

On its own, the proposed 110,000 visa limit will probably not “prevent the visas from being exhausted in short order in the next few years,” she says. The bill would also, how-ever, impose hefty fees (up to $10,000 per worker) on heavy users of the H-1B visa system, such as IT companies. That change could open up the visa pool to other employers, in-cluding small companies, says Sumption.

MARIELLE SEGARRA

DISCLOSURE

Source: U.S. Citizenship and Immigration Services

Number of days before the 65,000-visa cap was reached

0

50

100

150

200

250

300

350

’13’12’11’10’09’08’07’06’05’04’032

323

184132

56

1

264300

235

73

5

Here One Day, Gone the NextThe H-1B visa program has not hit its cap this fast since 2008.

Don’t tweet tidbits about your company’s first-quarter earnings just yet.

The Securities and Exchange Commission announced in April that companies can use social media outlets such as Facebook and Twitter to disclose key infor-mation in compliance with Regu-lation Fair Disclosure. But inves-tors have to be alerted which social media channel a company will regularly use to disseminate such information, and the SEC says each case will be evaluated on its own merits.

The announcement, contained in a report of the investigation into a Facebook posting by Net-flix CEO Reed Hastings, says that Reg FD applies to social media the same way it applies to cor-porate websites: companies can disclose possible market-moving information on a platform only if they tell investors to look for it there.

If a company does not alert

“If I’m a CFO, I need to know not just what’s on my company’s Facebook page or Twitter feeds, but also what my executives’ pages look like.”

Jeremy Mishkin, attorney, Montgom-ery McCracken

SEC OKs Social Media Disclosures

Auditing standards could get a whole new look if the Public Company Accounting Oversight

Board chooses to enact a new pro-posal. The board’s plan, currently in the public comment period, would reorganize existing standards into one integrated, numbered system.

Under the plan, four-digit num-bers would replace the current hybrid method of labeling PCAOB audit standards. The new system would eliminate the classification of interim standards, though the board would continue to update or improve interim standards it is cur-rently working on. The proposal does not change the existing re-quirements for performing and re-porting on audits.

“It should come as no surprise to any professional person that auditing literature is extensive. As printed, these standards run to over 2,000 pages,” said PCAOB chairman James Doty at a board meeting in March. Navigating the audit stan-dards in their current form, he not-ed, “can prove daunting.”

The current hybrid classification structure is “not very easy to use or navigate,” added Martin Baumann, chief auditor and director of pro-

Topline

12 CFO | May 2013 | cfo.com

If you would like to submit a question to Bill “MrExcel” Jelen, e-mail him at billjelen@cfo.com.

Q: Is there a complete list of Excel keyboard shortcuts?

A: There are many lists floating around on the Internet, but the easiest source is right in Excel help.

Click the blue question mark at the top right corner of Excel. Search Excel help for “Keyboard Shortcuts.” The resulting article lists all of the keyboard shortcuts. If you want to have a hard copy of the list, use the Print icon at the top to print them.

Ask MrExcel

Bill Jelen

ALL THE EXCEL SHORTCUTS

This Excel help article lists all Excel keyboard shortcuts.

Figure #1

Having a Keyboard Shortcuts file on hand can save a lot of time in the long run.

Figure #2

AUDITING

MAKEOVER FOR AUDIT STANDARDS

fessional standards at the PCAOB. “This project will create an orderly classification of our standards.”

Under the proposal, all PCAOB standards would be grouped ac-cording to whether they fall under general auditing standards, auditing procedures, auditor reporting, mat-ters related to filings under federal laws securities laws, or other audit-associated matters. “If more audi-tors find it easier to read the PCAOB standards and to consult them more frequently, this framework for reor-ganization will . . . have fulfilled an important purpose,” Doty noted.

The proposal should also have more appeal with instructors, ac-cording to board member Jeanette Franzel. She hopes better categoriz-ing will make the standards easier to use as a common reference guide.

Baumann also believes the plan would help audit professionals who may have been confused about the distinction between standards man-dated by the PCAOB and those that are merely recommended by the American Institute of CPAs. Like the PCAOB, the AICPA also uses an “AU” abbreviation when describ-ing the use of its standards, which are called “Statements on Auditing Standards” and go by a “SAS” tag.

The PCAOB is seeking feedback on whether the approach makes sense or whether other changes need to be considered to improve audit quality. Comments are due on the proposal by May 28.

KATHLEEN HOFFELDER

Proposed Framework for Auditing Standard Reorganization

General Auditing Standards—Standards on broad auditing principles, concepts, activities and communications

Audit Procedures—Standards for planning and performing audit procedures and obtaining audit evidence

Auditor Reporting—Standards for auditors’ reports

Matters Relating to Filings under Federal Securities Laws—Standards on certain auditor responsibilities relating to SEC filings for securities offerings and reviews of interim financial information

Other Matters Associated with Audits—Standards for other work performed in conjunction with an audit of an issuer or a broker or dealer.Source: PCAOB

Or, copy and paste the article to Excel. After adjusting column widths, you will have a worksheet of the shortcuts.

®

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Topline

An Obama administration proposal to eliminate the tax deduction for reinsurance premiums paid by U.S.-based insurance companies to their foreign affiliates would boost prices for property-casualty and terrorism coverage, cor-porate risk managers say.

As a result of the provi-sion, which is part of the administration’s 2014 bud-get, coverage would be more expensive and harder to find, “particularly in urban areas

INSURANCE subject to terrorism risk and areas prone to natural disas-ters,” John Phelps, president of the Risk and Insurance Management Society, wrote in a letter to the U.S. House Ways and Means Commit-tee’s International Tax Re-form Working Group.

The letter was unfortunate-ly delivered on April 15, just before two explosions killed three people and injured more than 200 at the Boston Mara-thon. In a briefing, President Obama called the bombings an “act of terror.”

Currently, the U.S. tax code enables U.S.-based insurance carriers to take deductions for “ceding” reinsurance pre-miums to foreign affiliates. In reinsurance arrangements, the insurance company cedes parts of a larger potential risk to the reinsurance company. In exchange, the reinsurer gets part of the premium dol-lars the insurer was paid to take on the risk.

Citing a 2010 study backed by insurers and reinsurers in

the United States, Bermuda, and Europe, Phelps wrote that removing the tax deduction would reduce the overall sup-ply of reinsurance available to the U.S. market by 20%. That drop in supply would increase corporate consumer prices by $11 billion to $13 bil-lion annually, he wrote.

A common practice in the property and casualty indus-try, the use of foreign rein-surance by domestic carriers is an “efficient mechanism to pool risks, diversify expo-sures, reduce the volatility of losses, and as a result, en-hance availability of coverage and reduce prices for con-sumers,” the RIMS president wrote.

“Throughout the recent series of natural catastrophic events, and the terrorist at-tack on 9/11, foreign reinsur-ers have filled gaps in cover-age where domestic insurers either discontinued or se-verely curtailed coverage or significantly increased rates,”

Phelps added. DAVID M. KATZ

14 CFO | May 2013 | cfo.com

Russell G. Golden, a member of the Financial Accounting Standards Board since September 2010, will become FASB’s next chairman on July 1. He will replace current chairman Leslie Seidman, whose second term expires in June.

Golden’s appointment was announced in April by the Financial Accounting Foundation, FASB’s overseer. Before becoming a board member, Golden served for six years on FASB’s staff in various positions, including technical director. He also chaired FASB’s Emerging Is-sues Task Force.

As chairman, Golden plans initially to focus on con-verging accounting standards globally, he said during an April press call. “I am looking forward to working with the IASB [International Accounting Standards Board]

to try to arrive at improved converged conclusions,” he said. Although FASB and the IASB have made progress in accounting convergence, they still differ on several issues, such as accounting for credit losses and revenue recognition. Under Golden’s guidance, the board will concentrate on those issues as well as accounting for leases and insurance contracts.

Of the outstanding issues, changes to the way com-panies account for revenue recognition could be on tap soon, according to Golden. “We are close to issuing a very important converged solution on revenue recog-nition, which I have been working on for a number of years and believe will be a good success,” he said.

FASB will also look to continue its efforts on improv-ing private-company accounting through its work with the FAF’s Private Company Council, which Golden says is “doing an absolute fantastic job.” In April FASB and the PCC jointly asked for comments on an updated pri-vate-company decision-making framework.

Before coming to the accounting board, Golden was a partner at Deloitte & Touche in its National Office Ac-counting Services department. His term as FASB chair-man extends to June 30, 2017. K.H.

Golden

FASB CHOOSES INSIDER AS NEW CHAIRMAN

ACCOUNTING

Budget Proposal Could Hike Property, Terrorism Rates

Coverage would be more expensive, “particularly in urban areas subject to terrorism risk and areas prone to natural disasters,” according to RIMS president John Phelps.

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U.S. multinational companies that routinely allocate their profits to other countries to benefit from low-tax

jurisdictions may soon need to change their tactics. ¶ The Organisation for Economic Co-operation and Development is developing a global tax action plan, scheduled to be released in July, that targets transfer pricing aimed at tax avoidance.

ACCOUNTING & TAX

want to make sure that their tax base is at least stable.”

The U.S. government has a lot to gain from such a plan if it helps pre-vent companies from moving profits to lower-tax jurisdictions. Transfer pric-ing has enabled U.S.-based companies such as Apple, Google, and General Electric to pay less taxes in the United States.

To date, the OECD’s suggestions have been accepted by most industrial-ized nations. The U.S. is likely to back the OECD’s action plan when it is pub-lished. “I think there could be changes in the U.S. rules to accommodate the view of the OECD,” says Foley.

During a lecture at New York Uni-versity in April, Danielle Rolfes, in-ternational tax counsel in the Office of Tax Policy for the U.S. Department of the Treasury, said that “although we may not agree with other jurisdic-tions on all of the solutions that have been put forward, a starting place is that there is something wrong with the status quo in terms of how our interna-tional tax rules have evolved and how our domestic policy implementing those rules has evolved.”

Eventually, finance chiefs of mul-tinational corporations may have to adjust their current transfer pricing practices. “I am on calls every week with CFOs of Fortune 50 and For-tune 250 companies asking, ‘Where do we think this is go-ing? What should we be doing now?’” says Foley. “When the

report comes out in July, everyone’s going to have to be all over this and see what the implications are.”

Thinkstock

be done through an “exit charge.” The current transfer pricing guide-lines, which were last up-dated in 2010, do not have specific details on com-pensation for the country that loses tax dollars.

“There’s a tension point,” comments Hamada, “because shareholders really want the effective tax rate to be lower, but tax authorities

Profit Shifters Face Global CrackdownA new tax plan from the OECD could eventually hinder multinationals from moving profits overseas. By Kathleen Hoffelder

18 CFO | May 2013 | cfo.com

In February, the Group of 20 nations urged the OECD, which comprises 34 coun-tries including the United States, to develop the plan to help solve some of the tax inequities that exist globally.

Sean Foley, principal in charge of KPMG’s global transfer pricing servic-es practice in the United States, says the plan is sig-nificant. “It’s the first time the G20 asked the OECD to give them an action plan,” he says. “That’s never hap-pened before.”

According to the OECD, the action plan will con-sist of “comprehensive, coordinated strategies for countries concerned with BEPS [base erosion profit shifting].” (BEPS is the OECD’s term for the problem.)

While it is unclear what specif-ic strategies the plan may contain, Michiko Hamada, senior director at accounting advisory firm BDO, says it could include more-detailed infor-mation about the home country (or the one with higher taxes) being com-pensated for the loss when a tax base moves to another country. This could

“There could be changes in the U.S. rules to accommodate the view of the OECD.”

Sean Foley, principal, KPMG

Thinkstock

As Hamada notes, there are efficien-cies that can be realized through trans-fer pricing, but “transfer pricing should never be the tail that wags the dog.”

The OECD is also expected to com-mit to further analysis on the topic of profit shifting and to put out additional reports and recommendations over the next year. CFO

20 CFO | May 2013 | cfo.com

Should Your Audit Firm Do Your Taxes?New research shows that investors welcome the double duty.

Although many companies use their audit firm to perform tax

services, the practice runs counter to regulators’ professed preference for maintaining auditor independence. New research, however, shows that in-vestors welcome the practice.

On average, investors feel that the benefits of auditor-provided tax ser-vices outweigh the risks that the audit will not be performed independently enough, according to a study published in the spring edition of the Journal of the American Taxation Association, “Do Auditor-Provided Tax Services En-hance or Impair the Value Relevance of Earnings?”

The study (written by professors Gopal V. Krishnan of American Uni-versity, Gnanakumar Visvanathan of George Mason University, and Wei Yu of the University of Tennessee) looked at how the interaction between two variables—earnings, and the ratio of tax fees over total fees paid to the audi-tor—affected the stock prices of U.S.

publicly traded companies between 2000 and 2008.

After 28,000 observations of com-pany audits, the authors noted that the higher the ratio of tax fees to total audi-tor fees paid, the more pronounced the effect of earnings on a company’s stock price. Further, the authors found that when firms switched their tax-services business away from their auditors, the effect of earnings on stock price was lower in the year of the switch.

Typically, companies that have their auditors do their taxes benefit from discounted auditor fees. They also get a boost in “overall audit effectiveness via better communication between the audit and tax sides,” according to the study. Investors seem to like that.

“For firms currently using their au-ditor for tax services, our findings in-dicate that investors are supportive of their decision,” Krishnan tells CFO.

The Advantage of SpilloverSome companies give their audit and tax business to different firms to add credibility to their financial state-ments, notes Krishnan, even if doing so may cost more. But the study found that when companies decoupled the audit function from the tax-service function, investors did not view that as a positive. “This finding is consistent with the potential loss of knowledge spillover when tax services are provid-ed by someone other than the auditor,” noted the study.

Other research on this topic also shows evidence that more company knowledge is shared between the tax and audit functions when one firm is used. The spillover of knowledge that an auditor can receive from a tax pro-

fessional working on the same com-pany, according to Krishnan, is an important advantage to companies and auditors alike. “By doing the books and tax return, [auditors can] see the whole picture,” he explains.

Krishnan’s study raises important questions about the benefits and risks that further restrictions or outright ban-ning of auditor-provided tax services can bring to companies and their share-holders. More limitations “might have unintended consequences,” he says.

Under Sarbanes-Oxley, a company is permitted to hire the same audit firm to perform both audit and tax services if the audit committee approves. But regulators like the Public Company Accounting Oversight Board have cre-ated some limitations for the practice over the years. Auditor-provided tax services are barred, for example, when confidential tax transactions are de-ployed by a company merely to avoid taxes; when an audit firm acting in a financial oversight role provides tax services; and when an audit firm pro-vides tax services for which it receives a commission or contingent fee based upon a particular finding in their tax evaluation.

The European Union, meanwhile, has openly expressed its disfavor of auditor-provided tax services and may ban the practice. K.H.

ACCOUNTING & TAX

“By doing the books and tax

return, [auditors can] see the whole picture.”

Gopal V. Krishnan, professor, American University

LEASING BY THE NUMBERSSeventy-eight percent of businesses hold leases, according to a recent survey of 3,450 businesses in 44 economies by Experian for Grant Thornton. The average company holds 20 leases. The average per business is highest in Sweden (68 leases), followed by Japan (49 leases), Finland (39 leases) and Australia (25 leases).

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© 2013 Prudential Investment Management, a Prudential Financial, Inc. company. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. Prudential data as of 12/31/2012. Pensions & Investments is a registered trademark of Crain Communications, Inc. *As of 12/31/2011, Prudential Financial was ranked the 9th largest institutional manager, which includes the assets managed by Prudential Investment Management. Prudential Financial, Inc. of the United States is not affiliated with Prudential plc. which is headquartered in the United Kingdom.CP2013-0036

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CAPITAL MARKETS

other buyer. The first bidder then may be able to walk away without paying a breakup fee.

Some M&A practitioners also think that leaks from either a buyer or seller can drive a deal forward by pressur-ing the other party. A leak from a seller can force a prospective buyer, for ex-ample, to formally declare its interest. But the consensus of M&A practitio-

ners is clear: prematurely talking about a deal or let-ting information slip out is too risky.

A High CostFor almost any company, leaking a deal is a terri-ble idea, says Andrew M. Levine, a partner in the M&A practice at Jones Day. Not only would the indi-vidual or the company (or both) potentially end up violating federal securi-ties laws, it would also be breaching confidentiality agreements with the other party and violating internal company policy that any such disclosures have to be authorized by the board of directors, Levine says.

“We rarely see [leaking] nowadays, even among pri-vate companies,” says How-ard E. Johnson, managing director of Veracap M&A International. Aside from the potentially severe legal

ramifications, divulging a deal before a formal announcement is made comes at a high cost, he says. “If [a company] is going to use that as a tactic, they

Last February, a merger deal was prematurely leaked. The Securities and Exchange Commission froze

the Goldman Sachs account of a Swiss trader who alleg-edly bought a large number of Heinz call options the day before Berkshire Hathaway and 3G Capital agreed to buy Heinz. But such leaks, intentional or not, are becoming less frequent. Leaks involving mergers and acquisitions have

maturely, the second bidder “gains valuable information and time.”

On the buyer’s side, it’s advantageous for an acquirer to leak a bid when it wants to derail a deal or speed it up, investment bankers in-terviewed by Cass said. A leak can be a way to extend a deal’s completion time, frustrating a seller and causing it to end negotiations to look for an-

dropped in the past four years, falling from a high of 11% of deals during 2008 to 2009, to 7% during 2010 to 2012, ac-cording to the M&A Research Centre at London’s Cass Business School.

One reason, at least in the case of intentional leaks, is a subdued deal-making environment. “The target is less likely to be able to stoke up a bid-ding war and will therefore focus on getting the initial deal done,” says a new report from Cass. But there is an-other reason: What was once a more common practice may now be judged as too risky.

A report of 4,000 transactions from 2004 to 2012 released in April by the Cass Business School and data-room company IntraLinks did find some evi-dence that M&A leaks can help a deal. (The study used heavy preannounce-ment share trading as an indicator of a leaked transaction.) In the past eight years, deals in which there was signifi-cant preannouncement trading (SPAT) achieved higher bid premiums over the target’s undisturbed share price, ac-cording to the Cass study. From 2010 to 2012, targets in leaked transactions got a 53% bid premium on average, versus 30% for unleaked deals.

That may be because the initial bid sets a floor price and premium for the target, the Cass report says. In addi-tion, when an initial bid is leaked pre-

Do Leaks Pay?In theory, a seller and a buyer can benefit from prematurely disclosing an M&A deal. But the reality can be disastrous. By Vincent Ryan

22 CFO | May 2013 | cfo.com

“The group of advis-ers and people in the know on a deal has rapidly expand-ed in the last 10 to 15 years.”

Andrew M. Levine, partner at Jones Day

need to be very careful—they have to have a good story behind the leak be-cause it may have unintended conse-quences.”

It’s also a poor way to find another bidder, Johnson points out. Any com-pany that intentionally leaks news of a possible deal probably hasn’t shopped the deal well, he says.

Unintentional leaks are just as damaging. Experts say companies can mitigate the risk of them by drafting proper nondisclosure agreements and having strict policies and practices for document and data security. They can also try to limit the number of people

informed about the potential transac-tion and to complete the merger as fast as possible.

But new avenues for unintentional disclosure keep popping up, and deals get leaked. Despite efforts to keep them small, “the group of advisers and people in the know on a deal has rapid-ly expanded in the last 10 to 15 years,” Levine says, especially in cross-border deals. Information technology advanc-es also make it harder to keep a deal quiet.

Social BlundersThe latest kind of leak comes from mistakes involving social media. Po-tential buyers have been searching the LinkedIn profiles of employees of target firms without realizing the em-ployees can see that a competitor has

viewed their information. When this happens to more than a few employees at a target firm, rumors start to spread, says Johnson. If customers and em-ployees get wind of a deal early, it puts not just the deal but the company at risk, he says.

No matter what kind of leak, “it just leads to all kinds of distractions,” says Levine. The buyer or seller may want to slow down the deal to discover where the leak came from, and figure out what the leak could do to the share price of the target company.

The premium that leaked M&A deals earned in the Cass analysis could be because leaked deals tend to be of high quality. “A target in high demand and likely to attract bids from a range of parties has more incentive to leak information than a low-quality target with limited takeover interest,” the re-port notes.

But other data points from Cass show that a deal leak is harmful. Since 2008, deals that displayed lots of pre-announcement trading had no high-er probability of attracting a second, higher bid than unleaked deals, Cass found. And since 2004, deals with significant preannouncement trad-ing activity have taken longer to com-plete—124 days versus 116 days for those with no SPAT. What’s more, in the past two years deals display-ing SPAT were completed 80% of the time, compared with 88% when no SPAT was found.

“In the past, while perhaps counter-intuitive, leaks led to more deals falling apart,” Levine says.

Laws against market manipulation and insider trading around M&A deals have diminished such activity in the United States. In cross-border deals, however, companies have to be espe-cially vigilant to protect against and even prepare for leaks. About 7% of the deals in North America showed significant preannouncement trading from 2004 to 2012, but in the United Kingdom 19% of deals did.

The Cass report attributes the high number of incidences in the U.K. to a previous lack of regulatory enforce-ment and monitoring. Since 2007, however, the U.K.’s Financial Services Authority has spoken out about stra-tegic M&A leaks and counseled senior management of companies that they must establish a culture that actively discourages leaks. Two years ago, the U.K. Takeover Panel also introduced new requirements concerning the time frame in which the names of bid-ders have to be disclosed. U.K. deals displaying preannouncement trading have thus dropped to 13% of deals.

The analysis by the M&A Research Centre at London’s Cass Business School and IntraLinks looked at more than 4,000 global transactions between January 1, 2004, and October 16, 2012. A Cass spokesman says the average deal value was $1.9 billion, and the sample set was created so that the minimum equity value for the target was $100 million. This was done to exclude small-company targets with illiquid stock. CFO

23cfo.com | May 2013 | CFO

Loose Lips Rock ShipsAverage number of days it took to complete an M&A transaction*

*Based on a study of 4,000 transactions in the

eight-year period.

† Leaked deals were defined as those in which

the target company’s shares showed signifi-

cant pre-announcement trading activity.

Source: M&A Research Centre at the Cass

Business School of City University, London

Deals showing evidence of a leak†

Deals showing no evidence of a leak

132

0

30

60

90

120

150

’10-’12’08-’09’04-’07

115 118121112 110

“If [a company] is going to use [leaking] as a tactic, they need to be very careful—they have to have a good story behind the leak because it may have unintended consequences.”

Howard E. Johnson, managing director of Veracap M&A International

The fiscal 2014 federal budget plan unveiled in April includes a proposal to require that small em-ployers (defined as those with less than $20 million in annual payroll) automatically enroll employees in an IRA, though workers could opt out. The measure would apply to companies that offer 401(k) pro-grams and employees who don’t participate in those plans.

The purpose is to stimulate re-tirement savings through the auto-matic-enrollment feature. “About half of American workers have no workplace retirement plan,” the budget proposal states. “Yet fewer than 1 out of 10 workers who are eligible to make tax-favored con-tributions to an [IRA] actually do so, while nearly 9 out of 10 workers automatically enrolled in a 401(k) plan continue to make contributions.” Small

Small companies could be required to set up individ-ual retirement accounts funded by pretax deductions

from participating employees’ pay, if the federal govern-ment gets its way. Several present and former finance chiefs contacted by CFO say they support the idea, though in some cases with reservations.

Thinkstock

GROWTH COMPANIES

companies would receive tax credits to partially defray the costs of admin-istering the new retirement-savings option.

When asked about the proposal, small-company finance chiefs general-ly express strong concern for their em-ployees’ retirement savings, but some voice reservations about a mandated program. “I’m in favor of any proposal that fosters more retirement savings,” says Hank Funsch, former longtime CFO and now president of Dayton T. Brown, a $40 million defense contrac-tor. “Social Security will be challenged

in the decades ahead and cannot re-main the primary source of retirement income for younger generations. This proposal could help.”

To Paul Remington, who runs fi-nance at document management soft-ware vendor Westbrook Technolo-gies, the proposal “makes a lot of sense.

Most employees will not miss the funds invested in their IRAs, but if they do they can opt out. It’s a great way to get individuals to save for retirement.”

But Don Doherty, a veteran CFO and now chief executive at Fleetwood Fixtures, a provider of fixtures for retail stores, says he favors the proposal in theory only. “I am philosophically op-posed to it being a government mandate or in any way regulated, since it will inevitably cost more than it needs to if done that way,” he says.

Should the rule be mandatory, Doherty would prefer that the government carve out a portion of the FICA tax and deposit it into an

IRA-like plan on behalf of the employ-ee. The funds would be placed in trust for the employee and inaccessible for general use by the federal government.

Kathleen Wolf, finance chief at At-ari International Contracting, a small construction company, says that offer-ing the IRA plan should be optional. “I think this is a good thing, because so many people have so little saved for retirement,” she says. “But forcing it is like adding another layer of So-cial Security.” She also frowns at the costs that small companies would in-cur. “It’s like when the minimum-wage

24 CFO | May 2013 | cfo.com

Small Companies May Have to Offer IRAsA new proposal would require small businesses to automatically enroll some workers into individual retirement accounts. By David McCann

“Social Security will be challenged in the decades ahead and cannot re-main the primary source of retirement income for younger generations. This proposal could help.”

Hank Funsch, president, Dayton T. Brown

Thinkstock

jumps. You have to balance that out with something,” she says. “Generally speaking, it’s probably going to reduce someone’s compensation.”

Fiduciary ConcernsThere are other potential concerns for CFOs besides having to set up the plans and absorbing incremental costs. For one, they may be liable for mis-takes made with regard to the plans. The proposal as stated in the budget plan is silent on that count.

“This proposal is very lacking in detail,” says Gregory Marsh, vice presi-dent and corporate retirement plan consultant at Bridgehaven Financial Advisors, whose clients are mostly small and midsized companies. “Funds will be deferred out of payroll to an in-vestment vehicle, so there has to be a fiduciary. Who’s that going to be? The CFO? What happens, for example, if the company fails to automatically enroll someone who’s eligible to participate?”

Marsh also finds it problematic that there are no laws at present governing employer-run IRA programs. “With 401(k) plans we have a strict exist-ing body of law, ERISA [the Employee Retirement Income Security Act], that CFOs and others who make decisions on how to offer the plans must follow to make sure they don’t breach their fiduciary obligations,” he says.

25cfo.com | May 2013 | CFO

Will VC Firms Join The Crowd?How crowdfunding and venture capital can coexist.

Approved by the Jumpstart Our Business Startups Act in April 2012,

equity-based crowdfunding has be-come an increasingly popular vehicle for funding young companies, although the Securities and Exchange Commis-sion has yet to issue rules governing its use. But some venture capitalists worry that the practice of issuing shares over

Risks and RewardsThere are obvious chal-lenges to using venture capital and crowdfunding in tandem, experts say. “I’ve heard from [venture capital-ists] some trepidation about the possibility, because you would have situations where

companies are coming to the VC round with thousands of shareholders if they had a successful crowdfunding offer-ing on the Internet,” says David Lynn, partner at Morrison & Foerster. “That certainly complicates the capital struc-ture, particularly for the VCs who want to have a priority position.”

The VC firm “has got to be really stringent in making sure that the sourc-es of capital that the crowdfunding platform represents are credible,” adds Loucks. “Not just that they’re accredit-ed—that goes without saying—but that they can support the company through-out the lifecycle.”

Once the JOBS Act rules are final-ized, firms will be able to raise up to $1 million from nonaccredited inves-tors via crowdfunding. They will also be able to market Regulation D Section 506(c) private placements broadly, as long as they only sell equity to accred-ited investors, such as hedge funds. Because it has no dollar limit, the lat-ter form of equity-based crowdfund-ing would be more useful to companies that want to combine crowdfunding with VC financing, experts say.

Under this model, a VC firm might list a company on its website. If enough accredited investors were interested in investing, it would create a fund to col-lect money from participants. Current-ly, VC firms have to hide their solicita-tions behind a paywall. “As this rule gets written, we’ll probably see things that look more like crowdfunding, where venture capital investments in companies are made through websites or platforms where accredited inves-tors go,” says Lynn.

MARIELLE SEGARRA

the Internet to small investors could disrupt their industry and choke off a source of valuable capital to young companies.

Others, however, say that business-es seeking both seed and later-stage funding can potentially use crowd-funding and venture capital in tandem. Crowdfunding, they argue, can supple-ment venture capital and help compa-nies raise money faster.

David Loucks, CEO of boutique in-vestment bank Healthios, says venture capital and equity-based crowdfund-ing can be complementary. “We see it as a sequence, where crowdfunding plays a role and then venture capital plays a role,” Loucks says. But crowd-funding would not be limited to the seed stage, he says. Rather, companies could use it at a later stage to help ce-ment a deal.

“Let’s say you have a venture capi-talist who is considering an investment in a midstage biotechnology company. Fifteen million is already being invest-ed, but there’s another $5 million of capital needed,” says Loucks. “Crowd-funding could be a very effective way of attracting the extra funding that enables that transaction to [close]. The company achieves its financing, and the investors capitalize on the oppor-tunity.”

Crowdfunding could also help a firm raise the equity needed to ac-quire, say, a new technology without taking on an entire acquisition, says Loucks. “Rather than going to the capital markets on their own, compa-nies can look to crowdfunding to help them organize capital around a specif-ic initiative,” he says.

“We see it as a sequence, where crowdfunding plays a role and then ven-ture capital plays a role.”

David Loucks, CEO, Healthios

Corporate executives generally think it’s better to fill a vacancy in the CFO position by promoting from

within than hiring externally, new research shows. Finance executives support internal CFO hires even more strongly than the overall group, according to a top financial-officers recruiter. ¶ Among 583 executives of all stripes who partici-pated in a survey conducted exclusively for CFO by Korn/Ferry, 59% preferred the internal-promotion option, versus

HUMAN CAPITAL

41% for the external-hire course. Joshua Wimberley, head of the re-cruiting firm’s North America fi-nancial officers practice, says that breakdown is consistent with his anecdotal experience. But he specu-lates that among finance executives, preference for the homegrown choice “would probably be more like 80-20 than 60-40.”

Bringing a CFO in from the out-side “can be discouraging and de-moralizing,” says Wimberley. A company’s finance staffers, he says, “want to know that if they take on various roles in finance, and then move out to the business, and later come back into finance, there will be an opportunity for them to one day ascend to the top job.”

Of course, there are good rea-sons why companies might prefer to put an outsider in the CFO chair, Wimberley acknowledges. “But all things being equal, promoting someone can be inspiring and can

Mark Stephen/theispot

Execs Prefer Homegrown CFOsA majority of company executives favor internal candidates for the job. By David McCann

26 CFO | May 2013 | cfo.com

help create a succession-planning and leadership culture.”

Among executives who prefer in-ternal candidates for CFO, more than half (52%) said that the best candidate would be a controller or vice president of finance, followed by a divisional fi-nance chief (42%). Only 2% said that the treasurer would be the right per-son for the job. (See “Who’s the Next CFO?” page 28.)

These results show that most executives “still hold to the legacy view that the CFO should foremost be strong in accounting and con-trols,” Wimberley says. But a CEO looking for a more strategic finance chief may prefer someone instead with strong first-hand experience in business units and operations, he notes. “When we do CFO searches for large-cap companies, CEOs and boards love to see that type of ex-perience, even if it doesn’t exist as much as we would like,” says Wim-berley. Such a CFO would have a strong controller and thereby be freed up to focus on forward-look-ing functions like capital budgeting and strategic planning and analysis, he says.

In fact, Wimberley says that the survey participants’ preference for promoting a controller or vice pres-ident of finance over a divisional CFO is backward; divisional finance chiefs are in fact more likely to get the call. “The responses to this question underrate the reality of what CEOs are looking for,” he says.

Wimberley also finds the paucity of support for treasurers as poten-tial CFOs to be out of step. “The treasurer is often a very bright,

Most executives “still hold to the legacy view that the CFO should foremost be strong in accounting and controls.”

Joshua Wimberley, Korn/Ferry

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strategic person,” he says. “Some of the brightest minds in finance rotate through treasury.” CFO

HUMAN CAPITAL

28 CFO | May 2013 | cfo.com

Employee Pay SurgesSalary levels have risen nationwide for four consecutive quarters.

The unemployment rate, though edging down, is still higher than

most economists consider consistent with a fundamentally healthy econo-my. But by another measure of fiscal health—the level of compensation for those who are employed—these are boom times.

Average total cash compensation among employed people, which was generally stagnant from 2009 through 2011, surged in 2012 and is showing no signs of slowing down, according to PayScale, a compensation research firm. The rate of increase has been greater in the past two quarters than at any time since the index was estab-lished at the beginning of 2007.

Increases in 2012 from the year-ago period were 0.7% in the first quarter,

Who’s the Next CFO?

Internal promotion of a finance executive

48%

External hire of a finance executive

36%

Internal promotion of an operations or business-line leader

11%

External hire of an operations or business-line leader

5%

If your company’s CFO resigned, what (in your opinion) would be the most likely source of the best replacement?

Source: Korn/Ferry International, exclusive survey

for CFO of 583 high-ranking corporate executives

with a variety of titles.

If the company filled the CFO seat in-ternally, from what role would the best candidate be promoted?

Controller or VP finance

52%

Divisional CFO

40%

Business-unit leader

3%

Treasurer

2%

Operational leader

2%

Other

1%

The firm keeps the index consistent by applying a compensation model based on how the workers whose data was used in setting the index’s base level at 100 were distributed by years of experience, geography, industry, and company size.

PayScale believes the recent salary explosion was driven by overall bet-ter economic performance and pent-up pressure to increase compensation following the limp 2009–2011 period, says Tim Low, a vice president at the firm. Indeed, over a four-quarter pe-riod beginning with the second quar-ter of 2009, the salary average actually decreased each quarter.

Fracking PaysSalaries are rising faster in some indus-tries than in others. In the first quarter of 2013, mining/oil-and-gas explora-tion led the way, soaring 5.2% higher than in the first quarter of 2012, driven largely by a boom in fracking for natu-ral gas. Financial services came next, at 4.7%. The lowest increase among the 15 industry sectors tracked was transpor-tation/warehousing/storage, at 2.5%.

Aside from the national upward trend in salaries, another notable shift that has emerged is that salaries are growing faster at small employers (up to 99 employees) than at large ones (1,500-plus employees). This trend, which began in the first quarter of 2012, was pronounced in the most re-cent quarter: a 5.5% pay increase at small companies versus 2.5% at large ones. The only other quarter when small companies outstripped large companies was the first quarter of 2007, when the index began.

PayScale attributes this change of circumstance to “a fundamental shift in the job economy and talent market, whereby small companies are increas-ingly competing in the same playing field for talent as large companies and must come to the table with compara-ble offers,” says Low. D.M.

2% in the second quarter, 2.6% in the third quarter, and 3.5% in the fourth quarter. For the first quarter of 2013, the increase was again 3.5%.

That doesn’t exactly mean that the people who filled out PayScale’s online survey a year ago have received a 3.5% raise. “The index does not follow sal-ary increases for specific people,” says Katie Bardaro, PayScale’s lead econo-mist. “Rather, it tracks the market prices for jobs.” The database is con-stantly refreshed; PayScale gets about 4 million unique visitors to its website each month, and the salary index uses recently input data.

Another notable shift that has emerged is that salaries are growing faster

at small employers (up to 99 employees) than at large ones (1,500-plus employees).

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bank’s April announcement that it would inject $1.4 trillion into the Jap-anese economy means foreign-ex-change rates could move drastically in the other direction. Indeed, the yen weakened beyond 99 to the U.S. dol-lar in April, revisiting levels not seen since 2009.

Firms with revenue streams from Japan that are not protected against yen volatility have a tough choice of whether to hedge now and try to minimize further losses or hope the yen strengthens. On the other hand, the prospect of more yen weakening could tempt well-hedged companies to take profits on in-the-money hedg-es that they entered into when the yen

Courtesy Bank of Tokyo

STRATEGY

Companies with exposure to the yen-U.S. dollar exchange rate have possibly had a wrench thrown

into their hedging plans this year as a result of the Bank of Japan’s new, more aggressive policy of monetary easing. After a period of yen strengthening, the Japanese central

their currency holdings, he explains; China, in particular, had been a big buyer. But that stopped six months ago.

There are also forces from the other direction, however. In particular, the United States’ own monetary policy has the same aim as Japan’s and is un-likely to cause any strengthening in the dollar versus the yen.

To Hedge or Not?In the short term, currency markets contain a lot of noise, much more so than other markets, says Ohanissian. “True economic fundamentals take a long time before they actually exert themselves on currency rates,” he says.

For nonfinancial companies—almost all of which are not speculating in for-eign exchange—the aim of hedging is to avoid any earnings hits from currency-pair volatility arising from the noise. “It’s not just the economic gains and losses but also the effects on the per-ceptions of the quality of the business and its revenues,” notes Ohanissian.

Right now, companies that have al-ready hedged their yen earnings expo-

was as strong as 80 to the dollar. The yen’s first-quarter weakening

in relation to the dollar has already hit U.S. companies’ first-quarter earnings. Firms that did not hedge their yen ex-posure, whether from sales in Japan or financial investments held in yen (in-cluding U.S. company pension funds), are likely to show losses. But further yen depreciation is a question.

The central bank’s move would ar-gue for a further weakening of the yen. And indeed, the reality is that at 80 yen to the dollar, the currency was trading at a significant premium to fair value, points out Andre Ohanissian, a prin-cipal at Forex Capital Advisors. Cen-tral banks were buying yen to diversify

32 CFO | May 2013 | cfo.com

Japan Easing Heightens Yen ExposuresThe Bank of Japan’s more aggressive monetary policy may deepen losses for unhedged U.S. companies. By Vincent Ryan

Source: S&P Capital IQ

The Yen Weakens

¥75

80

85

90

95

100

¥105

AprMarFebJanDecNov

2012 2013

Bank of Japan, Tokyo

Yen/U.S. dollar

Courtesy The IMF

sure would be wise to continue rolling over their in-the-money hedges, says Ohanissian. On the other hand, U.S. companies that are not hedged have taken a beating, and the question is whether or not to put on a hedge now. Those companies may be reluctant to put on a hedge because they think it too expensive. But the yen could drop further, amplifying the estimated 17% mark-to-market losses such companies have absorbed to date.

One way to cheapen the cost of hedging yen exposure would be to use a structured strategy with options, says Ohanissian. That would involve combining the sale and purchase of yen options at different strike prices to establish a floor and ceiling on the price movements.

Complicating the picture, of course, U.S. companies may not have a good forecast of their revenues from Japan. With a weakening yen, goods from companies outside Japan become more expensive to Japanese businesses and consumers. So a company could over-hedge and take a hit to earnings—and if it is a loss the CFO would have to explain that action to the board. Some CFOs, therefore, find underhedging or not hedging worth the risk, and would rather just call themselves the victim of larger market forces. CFO

33cfo.com | May 2013 | CFO

IMF Criticizes Easy Money PoliciesWhat will happen when central banks pull back on their monetary easing?

When the major central banks in-evitably try to end their aggressive

monetary stimulus, the casualty could be financial stability, according to a re-port released in April.

The report, from the International Monetary Fund, echoes some of the rising voices expressing concern about the smooth withdrawal of what the

Federal Reserve Board of Governors calls “monetary accommodation.”

The IMF says that po-tential consequences to a pullback from ultralow interest rates and quantita-tive easing could include capital losses for banks and adverse effects on liquid-ity and prices in bond mar-kets. A disruption to the long-term liquidity that some major central banks are supplying to support credit creation also poses a danger.

Even if one central bank times its exit right, uncoordinated tightening across the central banks studied—those of Japan, the United Kingdom, the United States and the European Union—could lead to “potentially dis-ruptive” financial flows between mar-kets and countries, the IMF says.

A Host of RisksThe Federal Reserve and the other central banks will inevitably need to raise interest rates to safeguard price stability. But rising rates present a host of risks, especially if they come rapidly and are not well telegraphed by the central banks, the IMF says.

For banks and their borrowers, an ill-timed increase in rates could be damaging. While banks welcome high-er rates because they boost income, higher rates also cause capital losses on fixed-rate securities (“weakly capi-talized banks could particularly suf-fer,” says the IMF). In addition, the performance of banks’ loan books could weaken measurably if rates rise quickly.

Financial institutions that hold large portfolios of government bonds could be hurt the most from rate jumps. Japa-nese banks, for example, hold so much domestic sovereign debt that a 100-ba-sis-point increase across the yield curve would lead to mark-to-market

losses of 10% to 20% of precious Tier 1 capital, according to the Bank of Japan. Similarly, in Italy, a 200-basis-point increase in rates would shave 7.7% off the capital of domestic banks, the IMF says.

A shift to tightening will presumably also cause central banks to end quan-titative easing—asset pur-chases that have boosted credit markets and low-

ered long-term rates. The uncertainty over whether central banks will sell those large portfolios back to the mar-kets could cause instability, especially if central banks’ asset buying has been masking market “dysfunction,” the IMF says.

In addition, generally loose mon-etary policy and ample liquidity could be propping up weaker borrowers, says the IMF: “Central banks…are giv-ing banks an incentive to evergreen [roll over] nonperforming loans in-stead of recording losses in their profit and loss accounts.”

But international economist Bill Ad-ams of PNC Financial Services Group thinks the IMF’s analysis is painting only a partial picture of how the exit from loose monetary policies will play out. In looking at linkages between unconventional monetary policies and financial stability, the IMF is ignoring the positive effect of those policies on the macro economy, he says.

“Macro performance is incredibly important to financial stability,” Ad-ams says. “If the economy does bet-ter, then financial stability tends to improve, and [U.S. monetary policy] has definitely played a big role in the recovery of the economy, particularly the housing sector.”

Adams says he is confident that as the Fed “engineers its exit from quanti-tative easing, it can be expected to man-age the size of its balance sheet to keep interest rates on a stable path.” V.R.

Rising rates pre- sent a host of risks, especially if they come rapidly and are not well telegraphed by the central banks, ac-cording to the IMF.

At the end of your most recent fiscal year you were holding $21.5 billion of your clients’ cash. What do you do with it?We have a sophisticated investment strategy that generates interest in-come, which is an important part of ADP’s earnings. We’re earning a 2.2% to 2.3% return. The strategy has several priorities. But number one, it’s our clients’ money, so we have only very safe investments that could be liquidated at any moment if we had to.

We also borrow against those investments. We have a hold-to-ma-turity and borrowing strategy that maximizes the overall yield. The 2.2% comes from investing longer and borrowing to balance out liquid-ity needs that may arise due to fluc-tuations in the fund balances.

And then we have similar busi-ness models, where, for example, if you use our 401(k) solution, we col-lect company contributions and hold them for the few days between the issuance of paychecks and when the money shows up in employees’ ac-counts. We also have some workers’ compensation offerings that work like that.

What are you doing with the $1.5 billion of your own cash on your balance sheet?Our business has very good free cash flow. That’s a very important value proposition to our investors. It’s a low-capital-intensive business, but we spend $150 million to $200 million a year on capital investments and maybe $400 million on acquisi-tions. And we have a dividend yield between 2.5% and 3%. We also have a continuous share-buyback pro-gram. The outstanding shares of common stock have been reduced by about 10% over the last five years in order to offset dilution from employ-

Automatic Data Processing, the provider of seemingly ubiq-uitous human-resources sys-tems and services, processes paychecks for about one in six American workers. At any mo-ment the company is holding $20 billion to $25 billion worth of its customers’ payroll funds be-fore disbursing them to the cus-tomers’ employees. Even in this age of ultralow interest rates, the company manages to gen-erate a fairly healthy return on investing customer cash, says Jan Siegmund, who took over as CFO in November.

ADP generally has on its bal-ance sheet about $1.5 billion of its own cash, which it uses to pay dividends and make an average of about eight acquisi-tions per year. (Shareholders have received a payout from ADP for 38 straight years.) Free cash flow is especially strong these days, according to Sieg-mund. It’s why ADP is one of

only four U.S. companies to have a triple-A credit rating from both Standard & Poor’s and Moody’s Investors Service (the others are Exxon Mobil, Johnson & Johnson, and Microsoft).

Historically, ADP mainly pro-vided “core” HR technology for payroll processing, payroll tax compliance, and benefits ad-ministration. But over the past few years it has been acquiring its way toward competitiveness in the talent-management soft-ware space.

About two-thirds of the com-pany’s 600,000 or so clients have fewer than 50 employees. Most of the rest have up to a few thousand workers, but at the high end ADP has an offering called GlobalView that provides an integrated payroll and HR solution for the largest multina-tional companies.

Recently, Siegmund talked to CFO about ADP’s strategies and the HR technology market.

Other People’s MoneyAs Corporate America’s paycheck- processing king, ADP has a lot of spare cash on hand.

ON THE RECORD

AN INTERVIEW WITH

JAN SIEGMUNDCVP and CFO, Automatic Data Processing

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35cfo.com | May 2013 | CFO

ee stock-compensation programs and to increase earnings per share.

What has ADP been doing with re-gard to talent management?We see talent management as hav-ing five major components: recruiting, performance management, succession planning, compensation management and learning. Those are all part of our talent-management suite.

We started with a recruiting solu-tion about seven years ago. Five years ago we formed an alliance with Cor-nerstone on Demand to distribute its talent-management product. About three years ago we acquired a com-pany called Workscape, which had a benefits-administration system and was also a market leader in compensa-tion management, and we added three modules to make it our suite.

How did your payroll customers re-spond as you introduced your tal-ent-management modules?Clients today more often than not want to buy products that are avail-able as an integrated suite. That’s been the driver of our strategy, to transform ourselves from a more silo type of company with best-of-breed applica-tions to the suite concept.

You’ve been trying to catch up in talent management, but according to your most recent annual report your research-and-development spend was only about 6% of rev-enue. Some software companies are spending three times that much on R&D. How do you arrive at an ap-propriate level of development?Well, as CFO I face a lot of demands for spending money, and our R&D folks are not short on new ideas!

ADP has always stood for service with our payroll solutions and strength in regulatory compliance. Our new CEO, Carlos Rodriguez, who came on board a year and a half ago, has really made it a point to emphasize that we

Jan Siegmund, CVP and CFO, ADP

ON THE RECORD

also care about in-novation and techno-logical competence. So we have made a lot of investment in devel-oping better product faster.

But we have done so while keeping the ratio of R&D to rev-enue roughly in the same area. We didn’t even take it down during the economic downturn. Now we are focusing on reducing the com-plexity of our product portfolio, which grew out of all the acquisitions we have done. So we have fewer products but are increasing the R&D dollars available for them.

When you see 6% [spent on] R&D, it’s a little misleading. We are invest-ing far, far more than that on our tal-ent-management suite. But in payroll, in absolute-dollar terms we already in-vest four times what our nearest com-petitor does, so we don’t have to think about having a certain percentage of revenue in the product.

What are your observations about the HR technology product market? There have been a lot of changes in the past couple of years.Yes, it’s a dynamic market space, with SAP acquiring Success Factors, Oracle

buying Taleo as a consequence and Cornerstone going stronger to market. Workday is being very active in the large-company ERP market. So ADP is playing in a very attractive market, and it’s a market where we’ve obvi-ously shown that you can make good margins.

People ask me whether we face increased competition and how it’s changing our world. And my answer is, we always have faced competition. Fifteen and 20 years ago it was People-Soft that was transforming the upper end of the market, and today there’s a lot of talk about Workday and Ulti-

mate. So we’ve always had a slew of competi-tors and have always had to be on our toes. I take it as a good chal-lenge for us.

How does the busi-ness that ADP is in, HR automation, in-fluence what you as a CFO do day to day?

Everything I do aims to drive the growth of our business and make sure we are executing against our strate-gic growth initiatives. I was the chief strategy officer prior to this role and for many years I ran one of our busi-nesses. So I don’t come with a financial background. I’m a PhD economist, but I don’t have a CPA-type background.

Well, you’re the CFO. You’re re-sponsible for the accuracy of the financials, and you’ve got to sign off on them. Where do you get the confidence that the financials are on the money?Financial management and financial controls are a bedrock of ADP. We’re in the payroll business, and we do ac-counting stuff for clients. So it’s in our culture to have a very strong finance team. I do spend a good deal of time reviewing and overseeing the process.

INTERVIEW BY DAVID McCANN

36 CFO | May 2013 | cfo.com

ON THE COMPETITION:“People ask me whether we face increased competi-tion. Fifteen years ago it was PeopleSoft…and today there’s a lot of talk about Workday and Ultimate. So we’ve always had a slew of competitors and have always had to be on our toes.”

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Hill doesn’t limit her mentoring to women. “I feel a responsibility to mentor anybody who wants to be successful in their career.”—JENNIFER HILL, CFO, GLOBAL BANKING AND MARKETS AT BANK OF AMERICA

39cfo.com | May 2013 | CFO

{ }By Marielle Segarra

JENNIFER HILL was a managing director at Goldman Sachs in 2006 when she got the opportunity to take a job as CFO of Tisbury Capital Management, a hedge fund in London. During the decision-making process, Hill called up a former mentor. His advice has stuck with her ever since. “He said, ‘You always want your résumé to tell a story. What’s the next thing you want your résumé to say about you?’” she recalls.

TheArt Of Mentoring

Five female CFOs tell how mentors helped them succeed—and how they are returning the favor.

}{ }Women In Finance

Above, Matthew Furman; right, Bob Stefko40 CFO | May 2013 | cfo.com

Five years later, when Hill considered accepting her current position as CFO for Global Banking and Markets at Bank of America, “I asked myself the same question,” she says. “I will never forget his words on that.” Her mentor, she says, “helped me shape what my story looked like over time.”

Today, Hill is helping other young women shape the stories of their pro-fessional lives. In March, for example, she returned to her alma mater, Ham-ilton College in upstate New York, to talk to female students about careers in business. But she doesn’t limit her assistance to women. “I feel a responsi-bility to mentor anybody who wants to be successful in their career,” she says.

That feeling is shared by many wom-en in the top finance role. According to a study by Catalyst, a research organi-zation working to advance women in business, 65% of women who received support in their careers are helping de-velop younger staffers, compared with 56% of men who received support.

Mentoring is “really important” to increasing the number of women CFOs, says Lorraine Hack, partner at executive recruiting firm Heidrick & Struggles. “It’s an added perspective from someone who maybe has been there and done it.” But a good mentor doesn’t have to be female, she adds. “It could be men mentoring women, help-ing them navigate through some things that are seemingly more female-centric, whether it is balancing work with fam-ily or trying to break through for a promotion if someone feels stuck.”

CFO recently spoke with female finance chiefs like Jen-nifer Hill to find out why and how they mentor—what ad-vice they give, what they look for in a mentee, what they gained from their own guides, and how women in corpo-rate finance can approach mentorship strategically. Their stories follow.

Authentic Relationships{DIANE MOREFIELD}“Every step of the way in my career, at every single company, I’ve had mentors,” says Diane Morefield, executive vice pres-ident and CFO of Strategic Hotels & Resorts, a publicly trad-ed real estate investment trust based in Chicago. Ironically, when she graduated from college, networking and mentoring “were two concepts that I never had really heard about,” she says. But building a network and seeking out mentors came

naturally to Morefield, who describes herself as “a raging extrovert.”

“You have to be proactive,” says Morefield, who has been mentored by both men and women and has mentored junior employees throughout her career. “You have to take the ini-tiative to reach out [and ask], ‘Maybe we could have lunch once or twice a year, just one-on-one,’” she says. At the same time, “you don’t want to be a pest or impose, because by defi-nition, mentors are people who are executives and senior in their career stage who are very, very busy,” she says.

Aspiring CFOs should look for professionals either outside their company or not in their direct reporting line who can give them objective, independent advice on career matters, work issues, and even office politics, says Morefield. Chem-istry is crucial. “The best mentor relationships are authen-tic relationships,” she says. “They’re not because someone is simply trying to get ahead and they’re only ‘using’ [a men-tor]. A lot has to do with chemistry—you’re similar types of people, or you have a similar sense of humor, whatever.” Such connections are often rooted in gender, but they do not have to be: “I personally think it’s important to have both men and women mentors,” she says.

Today, Morefield is open to mentoring both women and men in early stages of their careers, as long as she “knows them in some way,” whether they work for her company or one of her previous companies. Of course, she has to be selec-

Sage advice “that has stuck with me for prob-ably about 20 years now: Give your people enough rope to try new things, but not enough to hang themselves.” —Karen McLoughlin, CFO, Cognizant

41cfo.com | May 2013 | CFO

tive. “If I met with everybody who reached out to me, I would never be able to get my job done,” she says.

Does she feel a responsibility to mentor women in par-ticular? “Absolutely,” she says. “We can all read the stats—the percent [of women] that have C-level jobs, the percent that are partners at law firms and accounting firms. There are a lot fewer of us, and I want to help support younger women who really want to advance their careers and balance their lives, particularly if they have children. I know how difficult that is,” she says, noting that she has three children herself.

But Morefield adds that she “would never limit mentor-ing to just younger women. I can name a lot of young men that have worked for me over the years that I’ve tried to help and advance.”

People with a Passion {KAREN MCLOUGHLIN}For Karen McLoughlin, CFO of Cognizant Technology So-lutions, mentorship has long been a two-way street. “I’ve always had the mind-set that if I want to move on and be promoted and do the next thing in my career, I need to en-sure that I have the right team in place to do what I’m do-

ing today,” she explains. “And so I think by definition, that creates an environment where you’re constantly looking to mentor people.”

Such an environment can benefit junior employees who may want to be mentored but are reluctant to make the first approach. Recently, says McLoughlin, she noticed a female director-level member of her team who she thinks has a lot of potential. “Given my title in the organization, that person might be afraid to reach out to me on her own, and so some-times I have to take the first step and say it’s OK that we can continue this dialogue and have this relationship,” she says.

Looking back on her own career, McLoughlin says she had “at least 10 to 12 people that I had a strong mentoring relationship with.” Such relationships were formal and in-formal, involving mentors inside or outside her company “who I thought I could learn something from,” be it techni-cal skills or “thought skills, how they conducted themselves, or thought about their business.”

Like Hill, McLoughlin received a sage piece of advice from one mentor “that has stuck with me for probably about 20 years now.” She quotes: “‘Give your people enough rope to try new things, but not enough to hang themselves.’” A mentor, she says, can “say something very simple but pro-

found that really makes you think about how you conduct yourself.”

At Cognizant, mentoring for McLoughlin isn’t about women per se, but about “people who I think have good, long-term opportunities to be successful.” In particular, she looks for mentees who have “a passion—somebody who can really contribute within the company.” But “it is a lot of fun if I can find young women” to mentor, she says.

Learning to Take Charge {SHERRY BUCK}When junior employees give a presentation at Lib-bey, the glass tableware maker, CFO Sherry Buck often gives them constructive feedback. “I will reach out to them and say, ‘Hey, you did this really well,’” says Buck, a former finance chief at Whirl-pool. “Or, ‘This is something that might help im-prove your confidence.’ When I reach out, some-times that makes people more comfortable to have ongoing conversations and ask for a mentor rela-tionship.”

Buck herself has had “quite a few” mentors during her career, formal and informal, male and female, most of them colleagues. “I try to sur-round myself with what I call my personal board of directors,” she says. She looks for a diverse group of mentors with different personalities who work across all the business units. “Being a

“A lot has to do with chemistry—you’re similar types of people, or you have a similar sense of humor, whatever.”—DIANE MOREFIELD, EXECUTIVE VP AND CFO, STRATEGIC HOTELS & RESORTS

}Women In Finance{

}Women In Finance{

The most important advice: “Advocate for yourself. Never let anyone tell you that you can’t do something.” —Sherry Buck, CFO, Libbey

Photo courtesy Juniper Networks

finance leader, to be very effective, I need to understand all the piec-es of the business,” she says. Buck also looks for advisers with differ-ent leadership styles, “people who may be more aggressive or have different approaches than I would have.”

Not that she’s a shrinking violet. “One thing I learned early on is not to be shy,” says Buck. Like the other finance chiefs profiled here, Buck mentors employees without re-gard to gender. “I will mentor people whether they’re male or female,” she says. “Having said that, I do try to make a conscious effort to reach out to female colleagues and give them feedback and coaching to help them get to their full-est potential.”

The most important piece of feedback she gives? “Advo-cate for yourself,” says Buck. “Never let anyone tell you that you can’t do something.” In her experience, she says, men are usually “much more aggressive about what they want and what they’re driving toward.” For some of the women that she has mentored, “I’m coaching for them to take charge of what they want.”

Female CFOs in the Fortune 500

Ranking in the Fortune 500 Company CFO 3 CHEVRON PATRICIA E. YARRINGTON 8 FANNIE MAE SUSAN R. MCFARLAND 10 HEWLETT-PACKARD CATHERINE A. LESJAK 16 J.P. MORGAN CHASE MARIANNE LAKE 35 HOME DEPOT CAROL TOMÉ 53 BEST BUY SHARON MCCOLLAM 68 MORGAN STANLEY RUTH PORAT 75 SUPERVALU SHERRY M. SMITH 82 ORACLE SAFRA A. CATZ 88 TIAA-CREF VIRGINIA M. WILSON 110 MACY’S KAREN M. HOGUET 111 INTERNATIONAL PAPER CAROL L. ROBERTS 114 STAPLES CHRISTINE T. KOMOLA 122 OCCIDENTAL PETROLEUM CYNTHIA L. WALKER 135 FREEPORT-MCMORAN COPPER & GOLD KATHLEEN L. QUIRK 140 UNITED STATES STEEL GRETCHEN R. HAGGERTY 142 TIME WARNER CABLE IRENE M. ESTEVES 167 SOUTHWEST AIRLINES TAMMY ROMO 173 MARATHON OIL JANET F. CLARK 185 GAP SABRINA SIMMONS 186 DUKE ENERGY LYNN J. GOOD (MERGED WITH PROGRESS ENERGY) 214 GENUINE PARTS CAROL YANCEY 220 SARA LEE MARIA HENRY (NOW HILLSHIRE BRANDS)

234 AVON PRODUCTS KIMBERLY A. ROSS 235 AON CHRISTA DAVIES 240 PUBLIC SERVICE ENTERPRISE GROUP CAROLINE DORSA 246 XCEL ENERGY TERESA S. MADDEN 264 WHOLE FOODS MARKET GLENDA FLANAGAN 270 CDW ANN E. ZIEGLER 280 KBR SUE CARTER 283 BLACKROCK ANN MARIE PETACH 286 PROGRESS ENERGY LYNN J. GOOD (MERGED WITH DUKE ENERGY)

301 FAMILY DOLLAR STORES MARY A. WINSTON 306 GILEAD SCIENCES ROBIN L. WASHINGTON 309 HERTZ GLOBAL HOLDINGS ELYSE DOUGLAS 311 KINDER MORGAN KIMBERLY ALLEN DANG 315 RELIANCE STEEL & ALUMINUM KARLA R. LEWIS 323 STEEL DYNAMICS THERESA WAGLER 326 COMMERCIAL METALS BARBARA R. SMITH 327 HORMEL FOODS JODY H. FERAGEN 370 MASTERCARD MARTINA HUND-MEJEAN 374 WEYERHAEUSER PATRICIA M. BEDIENT 390 CORN PRODUCTS INTERNATIONAL CHERYL K. BEEBE (NOW INGREDION)

393 CORE-MARK HOLDING STACY LORETZ-CONGDON 398 COGNIZANT TECHNOLOGY SOLUTIONS KAREN MCLOUGHLIN 408 EASTMAN KODAK REBECCA ROOF (INTERIM) 429 AUTO-OWNERS INSURANCE EILEEN FHANER 430 SANDISK JUDY BRUNER 433 SEALED AIR CAROL P. LOWE 441 KELLY SERVICES PATRICIA LITTLE 450 LIVE NATION ENTERTAINMENT KATHY WILLARD 460 INSIGHT ENTERPRISES GLYNIS BRYAN 465 GANNETT VICTORIA D. HARKER 475 FMC TECHNOLOGIES MARYANN T. SEAMAN 477 CVR ENERGY SUSAN M. BALL 486 SUSSER HOLDINGS MARY E. SULLIVAN 488 EL PASO KIMBERLY ALLEN DANG (ACQUIRED BY KINDER MORGAN) 492 CELGENE JACQUALYN A. FOUSE 497 ERIE INSURANCE GROUP MARCIA A. DALL

Photo courtesy Juniper Networks 43cfo.com | May 2013 | CFO

A Community of Peers {ROBYN DENHOLM}As with many women in finance, most of Robyn Denholm’s mentors have been male. “I came up through the ranks at a time when there were very few women leaders,” says Den-holm, executive vice president and CFO of Juniper Net-works, a networking equipment maker. And like the other finance chiefs interviewed here, it doesn’t matter to her whether a mentor or mentee is male or female. “It’s really about the experiences that person has had—what you can learn from them, how comfortable you are with that per-son,” she says. [It’s the same with] the people that I’ve men-tored individually.” Mentoring is more important than gen-der, says Denholm, and “mentoring the next generation of CFOs [is] the primary responsibility.”

That said, “I do get asked to mentor a lot of women these days, and I think role models are important,” says Denholm. “I must admit, having grown up without a lot of role models in my career, I understand the importance of that.” She adds, “I get as much out of the relationships as I put into the relation-ships. Over the years, I’ve mentored many different individu-als. I think I’m a better person because of it.”

Denholm also participates in Vital Voices Global Partner-ship, a month-long internship program for aspiring female leaders. For two to three weeks each year, Juniper welcomes one of these women to its offices in Sunnyvale, Calif. The men-tee attends meetings, shadows executives like Denholm and meets other women in the program throughout Silicon Valley. The company took on its fourth mentee, a software engineer and start-up founder from Uruguay, last month.

Junior staffers can learn from their peers as well as their senior colleagues, notes Denholm. She is one of four female executives on the company’s leadership committee, and whenever they visit a company location, they convene infor-mal gatherings for women employees at different levels of se-niority. At the company’s global sales conference in Las Vegas last January, the executives held a breakfast for all the women in attendance. Such forums enable senior and junior staffers to mingle and talk about career journeys, work/life balance

and how they can get involved in other business units. Fostering a community of peers is one of the most im-

portant things a mentor can do, says Denholm. “Get people together and they can solve anything, whether they’re male or female.”

CFOs Need Mentors, Too{JENNIFER HILL}At Bank of America, Jennifer Hill believes it’s important for mentees to choose their mentors. “You need to know what you need from the relationship, otherwise it’s not going to work,” she says. Throughout her career, Hill has looked for mentors who have qualities she lacks.

“I look for somebody who has that something that I’d like to have, whether it’s a personality trait, a way of dealing with a situation or the capacity to build a team that can go through difficult situations,” says Hill. “Some people are great moti-vational speakers. Some people can rally the troops. Some people are very good at managing complex detail. There’s something that somebody has to offer, and only you know that when you’re looking for a mentor.”

Aspiring CFOs can also find ways to build more-organic relationships with executives they admire, says Hill. “Some-times it’s volunteering for things,” she says. “Some of the closest connections I’ve made are people who offered to help with something.” For instance, after a writer for the Financial Times gave a book discussion to a large group of women at the company, one junior attendee organized a book club for a smaller group of employees, including Hill. “I was struck by her initiative,” she says.

Once the junior employee created that connection, she asked if Hill had a few minutes for some career questions. “She created a natural opportunity to have a further discus-sion about her career,” Hill says. “Sometimes seeking out op-portunities to get to know somebody a little bit better on a slightly more personal level, which is often outside of people’s comfort zone, is the way you will connect with somebody.”

When looking for mentors, would-be mentees should ap-proach people who already know them, advises Hill. “I do a lot of work with my undergrad college [Hamilton], and when people send a blind e-mail following a talk or something, that doesn’t forge a connection necessarily. I think a small net-work of very close friends who you trust and who can be honest with you is far more effective.”

Such networks can be useful throughout a person’s career. Even CFOs can use mentors, points out Hill, who still keeps in touch with hers. “When you’re at a senior level, you don’t get a lot of praise. You don’t come in and get a hug every day,” she says. “Sometimes you need somebody to reinforce the things that you know you’re good at and remind you why you’re in the chair.” CFO

MARIELLE SEGARRA IS ASSOCIATE EDITOR AT CFO.

“Over the years I’ve mentored many different individuals. I think I’m a better person for it.”—ROBYN DENHOLM, CFO, JUNIPER NETWORKS

Weathering

Weather

IN THE FACE OF EXTREME WEATHER AND NATURAL DISASTERS, COMPANIES ARE

REENGINEERING THEIR SUPPLY CHAINS FOR ADDED RELIABILITY. BY RUSS BANHAM The

Since Hurricane Katrina devastated New Orleans in 2005, catastrophes like the massive floods in Thailand and Pakistan, a prolonged drought in the Southwestern United States, and the one-two punch of hurricanes Irene and Sandy seem to be occurring with more frequency, with expen-sive consequences for many companies. ¶ Leaving aside the political rhetoric over climate change and global warming, such extreme-weather events—along with natural disasters like the Japanese earthquake and tsunami—are exposing potentially risky supply chain practices predicated on cost-effectiveness. For more than a generation, companies have pursued lean manufacturing and just-in-time production models, outsourcing much of their manufacturing to trusted sole-source suppli-ers. Now, these popular practices are increasingly colliding with Mother Nature, who is doing her best to expose the fragility of these models.

44 CFO | May 2013 | cfo.com Thomas Jackson/Getty Images

In response, companies like ATMI, Kimberly-Clark, Roy-al Caribbean and Ford Motor have elevated climate change in their enterprise risk management methodologies. Indeed, according to a September 2012 survey by the independent Carbon Disclosure Project, 83% of S&P 500 companies are integrating climate change into ERM processes.

Insisting on these efforts in many companies are CFOs acutely cognizant of the need to balance the efficiencies of the supply chain against the risks posed by severe weather and other business disruptions. “The last thing we want to do is take our customers down,” says Tim Carlson, CFO of publicly traded ATMI, a classic B2B intermediary, which sources supplies to provide process solutions to the semi-conductor and life-sciences industries.

Other enterprises share this concern. According to an April survey by APQC of senior-level executives at 196 di-verse companies, 77% stated that their organizations experi-enced at least one unexpected supply chain disruption in the past 24 months. “The key word is ‘unexpected,’” comments Mary Driscoll, senior research fellow, financial management, at APQC, a nonprofit business process research firm.

More than half (56%) of the respondents said the disrup-tion was “serious enough” to draw their sustained attention and intervention. Ninety-two percent of these expressed levels of concern ranging from somewhat concerned to extremely concerned. “They were more worried about extreme weather than they were about political turmoil,” Driscoll says.

Why such worry? “Precious few companies have mod-eled the impact of extreme-weather risks on their global supply chains,” says Brendan LeBlanc, assurance leader in Ernst & Young’s U.S. climate change and sustainability ser-vices practice. “These threats aren’t scored in the risk regis-ter, they’re not monetized, and they’re not acted upon.”

EXPOSING THE PROBLEMTwo recent disasters that particularly compelled companies to review their supply chain practices were Japan’s earth-quake/tsunami/nuclear meltdown and the Thailand floods of 2011. Both caused extraordinary contingent business in-terruption problems arising from sidelined suppliers unable to provide expected manufacturing capacity.

“CFOs suddenly realized how exposed their supply chains were,” says Carlos A. Alvarenga, managing director in operations consulting at Accenture. “The Thai flooding alone created significant shortages in the hard disk drive market, generating hundreds of millions of dollars of losses for many electronics manufacturers. What I hear constantly from clients are questions over how volatile these events may become in the future and their potential economic costs, which for the most part have not been quantified.”

They’ve not been quantified for a simple reason: the availability of insurance to absorb the business-disruption

risks. “Companies assumed they could simply insure their way out of the problem, but after Thai-land and Japan insurers are more wary about extending coverage,” says Robert Muir-Wood, chief re-search officer at RMS, a disaster-risk modeling company servicing the insurance and reinsurance industries.

“After the events of 2011, there was definitely a tighten-ing of terms and conditions,” affirms Paul McNamee, divi-sion president, North American property and casualty spe-cialty lines, at insurer ACE USA. “Underwriters excluded contingent business interruption coverages emanating from critical catastrophe perils, particularly internationally. Since then, there has not been any additional tightening. A lot of this depends on the quality of companies’ supply chain risk management.”

RISK VS. COSTThe increasingly severe weather-related disruptions and greater difficulties acquiring broad insurance coverage are forcing major manufacturers to rethink their sole-sourcing and global supply strategies.

“For years, Toyota depended on its long-term trusted re-lationships with sole-source suppliers that were responsive, innovative and cost-effective,” says Charles Fine, professor of operations management and engineering systems at the MIT Sloan School of Management. The tsunami not only

46 CFO | May 2013 | cfo.com

After Japan’s earth-quake/tsunami/nucle-ar meltdown and the Thailand floods of 2011, “CFOs suddenly real-ized how exposed their supply chains were.”

Carlos A. Alvarenga, managing director in operations consulting at Accenture

WEATHERING THE WEATHER

Landov

47cfo.com | May 2013 | CFO

called that strategy into question, it also made Toyota real-ize that “it needed to be more geographically diversified in its supplier base,” says Fine. “Losing one [supplier] factory is a medium-sized disaster. Losing an entire region with multiple suppliers is a major problem.”

Alvarenga says that companies may not have fully com-prehended the risks of global supply chains. “Many compa-nies switched from local suppliers to distant suppliers on the basis of cost optimization, without considering the total cost of risk,” he says. “The extended global supply chain has many additional points of potential failure, encompassing natural disasters, epidemics and political instability. Com-panies that formerly had backup inventory, manufacturing facilities and proximate multiple suppliers are exposed to additional risks.”

Seventy percent of the respondents to the APQC survey say their organizations pruned their lists of suppliers over the past five years, with the intent to reduce costs. Near-ly three-quarters (74%) of the companies over the period added suppliers physically distant from their facilities, with 63% acknowledging that their suppliers are located in ar-eas of the world known for high-impact natural disasters, extreme-weather events or political turmoil. “The situation doesn’t look great,” says Driscoll.

Fortunately, the situation appears to be improving. One promising trend is the return of supply chain localization. “Companies that sourced supplies in China because of the low cost—that position is evaporating in some sense, with Apple now saying it will build more in the U.S. and others saying that as well,” Fine says. “When you factor in the risk and benefits of shorter supply chains, you have less invento-ry and thus less risk of inventory obsolescence. In the event of a weather disruption, shorter supply chains give you more flexibility to quickly change orders in transit.”

Also, 69% of respondents to the APQC survey say that in the past 24 months their organizations have taken steps to reach a better balance between sole-source suppliers, which reduce cost, and multisource suppliers, which reduce risk. Most (62%) state that their companies are conducting for-mal risk assessments of key suppliers on a semiannual or annual basis, and nearly half (44%) are assessing the resil-iency of the extended supply chain against disruptions.

These assessments then become part of the ERM process determining total cost of risk. “Companies need to address the impact of extreme weather on a holistic basis,” says Al-varenga. “The supply chain is systemic in nature, hence a problem in one area can easily affect the entire enterprise.”

Risks must be balanced against the cost-effectiveness of sole-source suppliers and far-flung supply chains. “A company needs to determine how much risk it is taking by working with a single individual supplier, and then compare this to the costs of having alternative redundant suppliers,” says Jeff Burchill, CFO at FM Global, a provider of property-loss engineering services and business property insurance.

FROM JUST-IN-TIME TO JUST-IN-CASERedundant suppliers are a critical necessity at Freeman Health System, a 517-bed, three-hospital system providing comprehensive health-care services throughout Missouri, Arkansas, Oklahoma, and Kansas. “We’ve had five major tornadoes over the past six years,” explains Steve Graddy, CFO of Joplin, Mo.-based Freeman. “We have redundancy through every one of our supply needs—preestablished or-ders with suppliers of implantable medical devices, medi-cines, food and water, in case our customary suppliers are knocked out by a blizzard or a windstorm.”

Making matters worse during such events is a sharp increase in patients afterwards. In May 2012, a tornado ripped through Joplin and sent 750 victims to Freeman’s Level 2 trauma center within a matter of hours. Within a week, more than 1,700 people were treated by the health system, some dispatched from nearby St. John’s Hospital, which had been destroyed. “We had everything we needed, thanks to the redundancies,” Graddy says.

Royal Caribbean Cruises also has precontracted with multiple “just-in-case” suppliers. “We have built in a lot of

redundancy,” says Brian J. Rice, vice chairman and CFO of the cruise-ship operator. “We have about 6,000 containers of goods that meet up with our ships around the world. Last year, fewer than 10 were problematic.”

The company attributes the suc-cess to its Marine Group, which is responsible for monitoring global weather patterns and analyzing the impact on ships at sea, as well as its Incident Response Group, in charge of alerting redundant sup-pliers in the event of a disruption. If a hurricane is headed toward the western Caribbean, for instance,

the Marine Group will direct a cruise ship in the area to change its itinerary and sail toward the eastern Caribbe-an instead. The Incident Response Group simultaneously alerts backup suppliers.

“The biggest thing is to expect the unexpected,” Rice says. “While we can follow the weather, something like that volcanic-ash cloud [from the 2010 eruption of Iceland’s Ey-jafjallajökull volcano] that shut down parts of Europe can-not be predicted. We have to have redundancies in place.”

Redundant suppliers ready to fill voids are also con-tracted at Irving, Texas-based Kimberly-Clark. “We’ve experienced disruption in our supply chain from severe-weather events, and have taken steps in the last three years to do some things differently,” says Scott DeGroot, direc-tor of supply chain strategy at the personal care product manufacturer. “We’ve now ensured that our key suppliers

“We’ve had five ma-jor tornadoes over the past six years,” says Graddy. “We have redundancy through every one of our supply needs.”

Steve Graddy, CFO, Freeman Health System

have contingency plans in place in case their suppliers are disrupted. When North Carolina was hit by a hurricane two years ago, one of our key suppliers reliant on capac-ity in the region informed us that backup components were available from its redundant suppliers.”

Kimberly-Clark also has worked with its transportation group to ensure dedicated capacity in the event that extreme-weather events affect shipping patterns. “Just hours after the Japanese tsunami, our transportation Center of Excel-lence in Knoxville [Tenn.] reported the impact on our in-coming demand stream to our crisis response center,” De-Groot says. “Within minutes, they were on the phone with our ocean shipping carriers to provide secured, incremental capacity.”

ATMI has also identified and qualified alternate sources as backup suppliers and touts a supply chain map and alert system focused on its top revenue-generating products. “We know where everything is coming from—not just the

48 CFO | May 2013 | cfo.com

There has been no dearth of unusual weather in recent years. Here is a sam-pling:

Since 2000, the world has experienced nine of the 10 warmest years on record since 1880.

More than 15,000 daily heat records were shattered across the United States in March 2012.

Texas experienced record drought conditions this year, while the North-eastern United States had record bliz-zards.

Two 100-year hurricanes (Irene and Sandy) hit New York in consecutive years, 2011 and 2012.

Whether or not these events were caused by global warming is not mate-rial (although the vast majority of sci-entists believe that climate change is under way). What is material is the risk of these events and their consequent costs. In 2011 alone, droughts, floods,

hurricanes and other extreme-weather events combined to cost the U.S. econo-my roughly $55 billion, according to the National Oceanic and Atmospheric Ad-ministration.

Meanwhile, a recent study by insurer FM Global indicates that the impact of natural catastrophes and man-made disasters has almost tripled since the early 1980s, as more people have moved into harm’s way. Over this period, in-sured losses have exploded from less than $10 billion annually to more than $100 billion.

Ninety-one percent of Americans now live in places at a moderate-to-high risk of earthquakes, volcanic eruptions, wildfires, hurricanes, flooding and other disasters, a study by the Hazards and Vulnerability Research Institute indi-cates. Nearly 60% of the world’s popula-tion, or about 3.9 billion people, are ex-pected to concentrate in urban areas by 2030, according to the United Nations. Where there are people there are busi-

nesses. And most urban areas are near a major body of water at greater risk from storm surge.

James Lawrence Powell, a former president of Franklin and Marshall Col-lege who served on the National Sci-ence Board for 12 years, is among the many scientists who expect the miser-able weather to stay, if not worsen. “The accumulation of these rare events tells you there is a ‘new normal,’ and it isn’t pretty,” says Powell.

“The earth is warming, which cre-ates more moisture and evaporation, resulting in more energy in the atmo-sphere,” he adds. “This, in turn, leads to more-ferocious storms. It also con-tributes to higher sea levels that create greater storm surges and wider inland flooding, as well as higher precipitation in some areas and much less in others. Even if you flipped a magic switch and no more carbon dioxide was emitted, global temperatures would still rise and cause all this havoc.” R.B.

WHO’LL STOP THE RAIN?

suppliers we buy from but who they buy from, too,” says Rick Eklund, ATMI director of supply chain management. “The tool goes very deep, recording the geographic coordi-nates of each supplier. The system processes data from the National Earthquake Information Center and weather pre-diction facilities worldwide, so we know when a disruption is occurring.”

When the Japanese earthquake and tsunami occurred, ATMI was able to quickly assess the impact on suppliers and subsuppliers in the region. “We knew exactly the ones that were affected,” Eklund says. “We were able to burn through some safety stock as we waited for our redundant suppliers to expedite materials.”

CFO Carlson says supply chain risk management has be-come as important to ATMI as supply chain cost efficiency. “The Japanese tsunami had both upstream and downstream implications for us, impacting what we needed from our manufacturing base, as well as what was in the pipeline from a customer standpoint,” he explains. “Fortunately, with our map and alert system, we could quickly enact a contingency plan.”

Take that, Mother Nature. CFO

RUSS BANHAM IS A CONTRIBUTING EDITOR OF CFO.

“The biggest thing is to expect the unex-pected. Something like that volcanic-ash cloud that shut down parts of Europe can-not be predicted.”

Brian J. Rice, CFO, Royal Caribbean Cruises

www.truphone.com/CFO

888-99-MOBILE

business.us@truphone.com

STAY CONNECTED.GLOBALLY.

INTERNATIONAL MOBILE ROAMING DOESN’T HAVE TO BE COSTLY OR COMPLEX.

Software For The PeopleBaffled by the ever-increasing variety of HR applications? Here’s how to choose the right ones for your company. By David McCann

But maybe you don’t ask those questions. The people sitting in your guest chairs are the company’s leading experts in HR and technology, after all. Still, how comfortable will you be when it comes time to sign off on the buying decision?

In either scenario, it isn’t easy to pull the trigger on an HR technology purchase. In part that’s because there is no perfect solution. No soft-ware firm can or will provide all the tools a company might want, with all the capabilities being the best on the market, and all tightly integrated down to the core design level.

Yet take heart: there is prob-ably a solution that makes sense for your company, even if it’s on the small side. “I just talked to a guy who’s got a new product coming out targeted at compa-

nies with fewer than 100 em-ployees,” says Naomi Bloom, a 40-year veteran of the HR tech-nology space who runs con-sulting firm Bloom & Wallace. “There’s no way that would be appropriate for large, complex companies.”

Until recently, Bloom adds, the technology challenge has been in “the awkward middle ground” of companies with, say, 500 to 5,000 employees. But today’s cloud computing–based tools have finally provided a pricing model that lets those companies pay a rate for the software based on their head count of 500 or 5,000, rather than 10,000 or more.

DOING IT RIGHTThere is a right way and a wrong way to go about buying HR technology. The right way

is to familiarize yourself with your company’s strategic plan, appraise the gap between your existing technological capabili-ties and what the plan says you need, and begin to replace or add the necessary components in a systematic, prioritized, bang-for-the-buck way.

The wrong way, which is far more common, is by simply re-sponding to pain points. “That never gets you to the right place,” says Bloom. “When you hear, ‘We’re running version seven of this system, and our maintenance contract expired, and we can’t do anything with mobile devices, and so we have got to buy this new system,’ you have to respond with your broad, strategic plan.”

Say the plan calls for the company to grow revenues from products less than five years old from 20% of total revenues now to 60% within three years. “What will you have to do from a people per-spective to achieve that?” asks Bloom. “Double the sales force? Find better salespeople? Train them better? Have bet-ter incentive compensation plans?” The answers to such questions should lead you to

51cfo.com | May 2013 | CFO

Human Resources TechnologySpecial Report

Being the CFO and strategist that you are, when your human-resources and information-technology leaders show up at your office

proclaiming a need to upgrade your company’s HR technology, you no doubt have some pointed questions: Why now? What will we be able to do that we can’t do currently? What value does that have? How much is it going to cost?

Neil Webb

“When customers are looking at new applications, one of the biggest drivers is the need to manage talent around the world,” says Kim Billeter, a consultant at Towers Watson. If you want to open a plant in Thailand, for example, talent-management software can help you find out who in the com-

pany speaks the language, is mobile enough to go work there, and has the needed skills. But even the large com-panies Billeter consults for are not yet taking advantage of such capabilities. “Many of our clients cannot do that to-day,” she says.

Talent-management applications

Human Resources TechnologySpecial Report

the products that can help you fulfill the strategic plan.

FINDING THE HIDDEN COSTSCFOs often evaluate HR technology based on direct costs, as in, “We’ll save a bunch of money if we move to a cloud HR system because it’s the ven-dor that has to maintain the hardware and the network, and do the mainte-nance and the upgrades.”

But there are problems with bas-ing the decision solely on hard-dollar savings from running the software. A cheaper cloud-based system may lack a good recruiting application, for exam-ple, and as a result there may be oppor-tunity costs or other indirect cost hits. “If it takes 60 days to fill a sales posi-tion, and the revenue target for that role over that time period is $100,000, that actually matters,” says Bloom.

The same applies to scheduling technology. Consider a manufacturing plant: if a worker calls in sick, someone else has to take that shift. But that per-son has to be certified to use the equip-ment pertaining to that job, and can’t have already worked beyond a certain number of hours that week or month. Any number of variables may apply.

“So [the] supervisor is out to din-ner with his family and gets a call from the sick guy,” Bloom says. “Well, today there is technology that can run a million reshufflings of the schedule instantaneously. He can do what he has to do from his smartphone within seconds.” Without such technology, though, the supervisor would have to do what he used to do: “go back to the office and pore over spreadsheets while the shift [loses] an hour of pro-duction time.”

GAINING AN ADVANTAGEAmong the many possible business goals facilitated by HR technology, one that is increasingly common concerns global staffing.

SCHEDULE ADJUSTMENT:

“So the supervisor gets a call from the sick guy,” says Bloom. “Today there is technology that can run a million reshufflings of the schedule instan-taneously. He can do what he has to do from his smartphone within seconds.” Naomi Bloom, Bloom & Wallace

52 CFO | May 2013 | cfo.com

Worldwide Average Large Medium Small

Administrative 95% 97% 97% 92%

Service delivery 49% 61% 48% 42%

Workforce management 45% 52% 47% 39%

Talent management 55% 72% 53% 44%

Reporting/visualization 53% 58% 52% 49%

BI tools 39% 46% 43% 31%

Workforce analytics/planning 15% 21% 13% 13%

Social media tools 26% 31% 24% 23%

Source: CedarCrestone, 2012-2013 HR Systems Survey of 1,246 employers

Application Adoption Level by Company Size

System Deployment Approach

0%

10

20

30

40%

2012 2013 (projected)

Outsourced(process

andsoftware)

Otherincludingin house/bespoke

HybridSaaS(subscription

based)

Licensedsoftware(hosted)

Licensedsoftware

(on premise)

38%

33%

18%14%

23%

35%

10% 11%9%

4% 3% 3%

Download these reports now at cfo.com/research

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saving time for managers, Cook says: “Can I measure that? I’m not going to spend the time to measure it. I know there’s an impact just by talking to people. When you multiply what a few people tell you—that they can focus on building and managing product instead of spending time on [general and ad-ministrative] stuff—it doesn’t need to be quantified.”

In fact, Cook doesn’t think there are “great standard ROI measurements” for HR software in general. “Most of the benefit is on the intangible side,” he says.

Steve Armond, CFO for technolo-gy-services firm T-Systems, agrees. “I don’t know of a good way to track that ROI,” he says. “ROI implies that there’s going to be some revenue created or costs avoided. The way I approach these products is to focus on deliver-ing the capability we need for the busi-ness at the lowest cost.”

WHAT’S OUT THEREThe HR technology product market traditionally consisted of “core” HR

can address another common goal with the potential for indirectly hitting the bottom line: identifying who among your company’s top-performing and high-potential employees are “flight risks.”

“Every organization has its one or two superstars at every level, and ev-erybody knows about them. But those ranked three through five are going to be very attractive candidates for other employers,” observes Richard Johnson, an associate professor at the State Uni-versity of New York at Albany who fo-cuses on HR technology. Talent-man-agement software can look at all the HR data available to the company and create profiles of the types of employ-ees who have left previously and their reasons for doing so.

Similarly, such software can help identify candidates who are likely to be successful, based on the traits of those who have succeeded previously. When recruitment goes online, “ap-plications go up dramatically, which creates additional overhead,” notes Johnson. “But with keyword-scanning software you can eliminate many résu-més immediately.”

And by automating various HR pro-cesses, like putting in a requisition for a new hire, completing performance-review forms, or documenting devel-opmental plans for employees, com-panies can free up time for managers. “Time is money, and we can save our executives, directors, and other man-agers a ton of time in doing those pro-cesses,” says Jim Cook, CFO of Mozil-la, maker of the Firefox web browser.

WHAT’S THE RETURN?But how well can the impact of such technologies be quantified? Although proving return on investment is what gets CFOs out of bed in the morn-ing, they tend to be skeptical when it comes to HR technology.

Continuing the discussion about

systems that manage employees’ per-sonal information, payroll, taxes, and benefits. Most CFOs are familiar with these.

Recent years have brought a bum-per crop of newer talent-management applications and suites that handle such functions as recruiting, perfor-mance management, succession plan-ning, compensation management, learning and onboarding (helping new employees acclimate to a company). Grasping the value those provide is a more nuanced undertaking.

There are big, comprehensive sys-tems aimed mostly at large companies that offer both core and newer types of HR technology. Some are based on technology developed in the 1990s that required (and still require) complicat-ed physical installations and heavy up-front capital costs. Most of the newer tools are cloud-based, with a pay-as-you-go pricing model.

Other systems are designed for smaller companies. At the same time, there is a raft of software designed to perform one or two specific tasks. A company could invest in the former or cobble together a collection of the latter, which may include some best-of-breed solutions not found in the big systems.

PATCHWORK QUILTINGOne option is to hire a third-party systems integrator to stitch together a handful of disparate tools. “That’s quite doable,” says Josh Bersin, princi-pal and founder of Bersin by Deloitte (until recently Bersin & Associates), a research and analysis firm focused on talent management, learning and leadership development. “So much of today’s technology is in the cloud, and the interfaces are fairly open, so you don’t have to upgrade the software ev-ery year with a whole new release.”

Rather, the cloud vendor performs the updates for you. And there are

BANG FOR THE BUCK:

There are not “great standard ROI measure-ments” for HR software in general. “Most of the benefit is on the intan-gible side.” Jim Cook, CFO, Mozilla

JIM COOK

54 CFO | May 2013 | cfo.com

Human Resources TechnologySpecial Report

Photo courtesy of Mozilla

55cfo.com | May 2013 | CFO

usually several updates per year, as opposed to one every year or two for installed systems, so the technology can get much more sophisticated very quickly.

“Even if you don’t have every-thing right away that you eventually will want, by looking at a vendor road map and understanding where they’re going, you might be able to pick up something that, first, will get you where you need to be now,” says Scott Bolman, a principal at Mercer who focuses on HR service delivery. “And then maybe in 18 months it will satisfy

all your needs, at a cheaper price than if you’d gone the other way and had an overpowered system for what you needed on Day One.”

On the other hand, systems integra-tors are not cheap, nor are they neces-sarily miracle workers. “It always costs more than you think it will, and you will still have data synchronization is-sues,” says Billeter.

For large companies, says Billeter, “if you’re staying with the big, broad vendors that have more-unified so-lutions, you’re probably going to be better off from a cost standpoint, a user-experience standpoint and a lon-gevity-in-the-marketplace standpoint.” For smaller companies, the formula for satisfaction is likely to be different. At T-Systems, Armond says his strategy has been to buy “best-of-breed solu-tions that have enough integration capability that I don’t have to create

a whole bunch of manual processes to get the core underlying data from point A to point B.”

BELLS AND WHISTLESAnother aspect of the buying decision relates to waste. Is it an inefficient pur-chase when the software has way more capabilities than you need?

“If you asked 100 people who use HR technology, whether core or talent management, what percentage of the overall functionality they actually use, I’d be shocked if the average was more than 50%,” says Bruce McDonald, vice

president of BPO governance at media company E.W. Scripps and a longtime HR technology buyer.

But it may not be helpful to think about a buying decision with that in mind, McDonald adds. It means you’re evaluating the software’s overall ca-pabilities rather than whether it meets your needs.

Still, for Armond, the potential for buying more than he needs is a concern. T-Systems formerly used a third-party software tool for certain HR-related transaction processes and reporting needs, but only needed 20% of its capabilities. “It wasn’t a flexible model such that we could simply con-sume what we needed as opposed to buying the whole,” Armond says.

Now, he says, if a vendor offers “X, Y and Z, and we’re only looking for X and Y, then we want to buy those at a price point that reflects a reduction in capa-

bility. If we can’t, we’ll keep looking.”Finally, if you are considering a

stand-alone solution from a smaller vendor, be careful, says Bloom. Two bad things could happen: “They will ei-ther be purchased”—in which case the buyer could morph the software into something you don’t want—“or they won’t have the resources to keep up, so you’ll be at an evolutionary dead-end,” she says. “There are lots of those [ven-dors] out there.” CFO

Source: CedarCrestone, 2012-2013 HR Systems Survey of 1,246 employers

Financial Impact Of Talent Management Software Integration

$0

100,000

200,000

300,000

400,000

$500,000

Net Income per employee Revenue per employee

NoIntegrated

TM

IntegratedTM

$489,866

$32,990 $25,473

$348,738

$0

100

200

300

400

500

600

$700,000

Net Income per employee Revenue per employee

NoYes

$607,989

$52,498 $26,918

$457,898

When applications are integrated with one another

When applications are integrated with one another on same platform as HRMS

COST CREEP:

Systems integrators are not cheap, nor are they necessar-ily miracle workers. “It always costs more than you think it will, and you will still have data synchronization issues.”Kim Billeter, Towers Watson

Note: Numbers may not add to 100% due to rounding

Source for all charts: CFO/Investor Group Services

The public markets are a chal-lenging place for CFOs, whose lists of tasks grow even longer

with the introduction of curious and impatient investors and height-ened regulatory scrutiny. Indeed, the CFO’s role may change more than that of any other corporate officer in the transition from private to public. And for small-cap companies, the increased responsibilities that come with trading publicly are not always accompanied by the same level of valuation, atten-tion and access to capital awarded to their large-cap peers.

In this quarter’s Deep Dive survey, CFO polled finance chiefs at publicly

Public KnowledgeFor small-company CFOs, the rewards of being public don’t always outweigh the headaches.

By Kate O’Sullivan

42%of small-cap companies have no analyst coverage, 31% are followed by just one or two analysts and only 8% are followed by more than five analysts.

DeepDive

while 31% are followed by just one or two analysts. Just 8% are followed by more than five analysts. In con-trast, at large-cap companies, more than half of respondents say they are followed by more than five analysts, while 19% have no coverage. Not surprisingly, nearly 60% of small-cap CFOs say they are not satisfied by their company’s coverage level.

Generally, CFOs give mixed re-views to the analysts they do have: 28% say analysts don’t understand their industry, while 37% say analysts don’t understand their company’s specific strategy. Sixty percent of respondents say analysts’ misconcep-tions affect their companies’ valu-ations. Respondents cite a lack of comprehension of their companies’ business models, market dynamics, competitive set, and future growth prospects.

Finance chiefs are equally luke-warm about their relationships with investment bankers. While 42% of respondents interact with an invest-ment banker at least monthly, CFOs

traded companies—a majority with market capitalization under $500 mil-lion—to learn more about the state of smaller public companies today and the role of the CFO at these firms. While results varied across the sam-ple of 84 respondents, the smaller the business, the more concerns the CFO tended to have about the company’s level of coverage and degree of access to capital.

JUST A MISUNDERSTANDINGMore than 40% of respondents at small-cap companies, defined as those with market caps of less than $500 mil-lion, have no analyst coverage at all,

CFO Takes the Pulse of U.S. CFOs

56 CFO | May 2013 | cfo.com

Analyst Coverage and Satisfaction

More than 10 | 6-10 | 3-5 | 1-2 | None

Number of Analysts:

0% 100%

Large Cap

29% 14% 33%5%

19%

0% 100%

Small Cap

19% 42%31%4%4%

Yes | No

Satisfaction with coverage:

Large Cap Small Cap

0% 0%100% 100%

35% 57%65% 43%

57cfo.com | May 2013 | CFO

score their bankers’ level of under-standing of their business at a decided-ly average 3.2 on a scale of 1 to 5.

David Johnson, CFO of Johnson Outdoors, an outdoor recreational equipment retailer with 2012 revenues of $415 million, says being publicly traded has its challenges for the Wis-consin-based company. The company is followed by one equity analyst and has an investor relations team of two, including the CFO. “It would be nice to have three analysts instead of just one,” says Johnson. “I don’t want to have 10, but it would be nice to have more coverage.”

To raise the company’s profile with investors, Johnson says he tries to go on the road two or three times a year, to investor conferences or to meet with investors in various cities. He also invites investors to the compa-ny’s headquarters. “We have to be fo-cused,” he says. “We can’t have a scat-tershot approach.”

SARBOX STRUGGLESEntering the public markets requires compliance with Sarbanes-Oxley, a daunting task for many smaller firms. Companies must also prepare their an-nual and quarterly financials in accor-dance with generally accepted account-ing principles and submit to annual outside audits. At LocalMediaLink, a business-directory publisher and a division of publicly traded Gladstone Equity Group, CFO Bob Nolan says one of his biggest challenges is meeting the deadlines for all of the company’s many reporting requirements. “Our finan-cial reports have to be in to the parent within a few days after our close each month,” he says—a quick turnaround for a small finance staff.

For about half of the CFOs sur-veyed, Sarbox compliance has had a significant impact on their businesses. One respondent notes the need to hire additional staff and the added cost of

outside auditors, while another points to the “significant paperwork burden.”

The most time-consuming part of being a public-company CFO, however, is managing short-term investor ex-pectations, according to 66% of survey respondents. Another 19% cite spend-ing time with analysts, while 15% say quarterly conference calls present the biggest time-management challenge. Slightly more than half of respondents say they would run their businesses dif-ferently were they not public. Says one, “If we were private, we would remove the insane focus on forecasting and planning and focus on top-line growth with measured profit increases.”

WHAT GAIN?Despite the work involved in keeping the books in order at a public com-

pany, many finance chiefs at small-cap companies say they don’t feel that they reap the reward of improved access to capital. More than 40% of respondents report that they do not have access to debt and equity at what they consider to be reasonable terms and pricing. Still, once they do choose to access the markets, the vast major-ity say the process is smooth and they have not encountered significant road-blocks.

The best way to get the market’s attention as a small public company, says Johnson, is by posting strong re-sults. “When we grow and increase our profits on a consistent basis, we get noticed.” Still, he adds, “We’ve found investors have a very short attention span, so we have to act fast to get the story out.” CFO

Most Significant Time Constraints

Managing short-term expectations of investors Analyst interaction Quarterly conference calls

0% 100%

66% 19% 15%

Analyst Coverage and Satisfaction

Yes | No

Understand industry?

Understand strategy?

Misconceptions impact valuation?

28% 37% 40%72% 63% 60%

Investment Bank Interactions

Frequency of interaction

About once per year 19%

A few times per year 14%

Every few months 19%

Bimonthly 6%

Monthly 25%

Weekly 17%

Understanding of business (on a one-to-five scale, with five being very well)

Five 11%

Four 31%

Three 31%

Two 19%

One 8%

to make sure they are spending effi-ciently to support their goals. As one finance executive told CFO Research in a global study of business spend-ing and investment in 2012, “It’s not so much about spending more or less. It’s about spending differently.”

But that’s nowhere as simple as it sounds. For employers, managing employee travel expenses represents an ongoing challenge to gain control and impose accountability, requiring them to persistently nudge employees to comply with corporate guidelines. Their efforts to gain visibility into employee spending and track where their travel dollars are going tend to be slowed by inefficient processes. For instance, companies that rely on many sources of travel-expense data in many formats—as contrasted with companies that consolidate that data into a single, unified format—must work harder to obtain robust, timely and comprehensive information on travel expenses. Two-thirds of survey respondents say they still rely on many sources of travel-expense data.

But despite both the technological and human challenges they face, com-panies aren’t about to ground their efforts to cut costs and improve op-erational performance in their travel-spending programs.

So concluded a study that CFO Re-search conducted earlier this year, in collaboration with software giant SAP. Fielding an online survey, CFO Re-

As companies scour the reviving economy for growth opportuni-ties, employees can’t help but

grow enthusiastic over the pros-pect that they are finally going some-where—literally.

Increased business-travel activity, after all, serves as an informal barome-ter of economic growth. Employees are likely booking more plane flights, rent-al cars and hotel rooms in an effort to serve—or attract—a growing number of customers. But before their employ-ees hit the road, companies would be wise to scrutinize their travel spending

Where Are Your Travel Dollars Going?Following your company’s travel expenses is a trip worth taking. By Matt Surka and Josh Hyatt

Field Notes

Perspectives from CFO Research

search collected responses from 173 senior finance executives at large and midsize companies in North America and Europe. The questionnaire focused on the tools and practices that finance teams use to set and enforce travel-spending policies, pinpoint patterns in their employees’ spending behav-ior and improve their ability to man-age travel expenses. (The full report, “Improving Control of Travel Spend,” is available for download at cfo.com/research.)

Survey respondents emphasize that they are indeed seeking tighter control over travel spending. But while finance executives are clearly aware of the long journey they face, there are hints that they remain less than confident about their ability to reach their ultimate destination. “The difficult piece is get-ting people to adhere to certain [travel] policies,” says the director of finance at a midsize nonprofit company.

A LONG WAY TO GOOnly about 12% of finance executives rate their company as excellent in terms of achieving employee compli-ance with travel-related spending poli-cies. More than 85% of respondents say that there’s some room for im-provement when it comes to employee

“The difficult piece is getting people to ad-here to certain [travel] policies,” says one finance chief.

Thinkstock

FIGURE 1

“To improve travel-expense management over the next two years, my company will focus on .”

Optimizing the level of control over travel-related spending

Maximizing the value of travel-related spending

Minimizing the administrative burden of travel-expense management

58 CFO | May 2013 | cfo.com

42%

30%

22%

59cfo.com | May 2013 | CFO

yield a meaningful financial benefit for their companies. The top barriers they face in that regard are “difficulty enforcing employee compliance” and “difficulty consolidating enough pur-chasing volume with a given vendor to gain negotiating leverage,” which were cited with the same frequency (see Figure 3).

Educating employees, however, is likely to prove more challenging than consolidating data. Frequent fliers, for instance, often find existing systems for travel booking too time consuming. And each employee has his or her own reason for seeking a policy exception. But once employees feel heard, they may be more willing to listen. The bur-den then falls on management to pro-vide them with tools that explain the logic underlying the policies and make it easier for them to comply.

compliance—and a third of those go so far to say that there’s substantial room for improvement.

Not surprisingly, then, retaking the reins is where a plurality of respon-dents (42%) plan to focus over the next two years. Much smaller proportions of respondents say they will spend that time maximizing the value of travel-related spending (30%) or minimizing the administrative burden of managing travel expenses (22%) (see Figure 1).

But optimizing their level of control over travel spending requires finance executives to achieve a delicate bal-ance, steering clear of any collision between the company’s need for con-trol and its strategic mandate to ag-gressively pursue growth. The CFO of a financial-services firm explains that “we have significantly increased the restrictions we place on employee travel” such as requiring the use of specific hotels or airlines. But, he adds, “the volume of restrictions makes it more difficult for us to police excep-tions—as there are so many.”

PLAYING FAVORITESSuch “preferred-vendor” policies proved to be astoundingly popular among the finance executives who answered the survey. Three-quarters of respondents make extensive use of such relationships. Nearly the same proportion of survey-takers (68%) most frequently cite better prices as the top benefit they receive from culti-vating such links (see Figure 2).

That said, 77% of respondents agree that making better use of such preferred-vendor relationships would

CFO Research is the research affiliate of CFO magazine, CFO.com, and CFO Conferences. We conduct detailed surveys of and interviews with senior finance executives from around the world. Combining their insights and our knowledge, we produce the intelligence you need to make better decisions. A complete archive of CFO Research re-ports is available at CFO.com/research.

More From CFO

Research

Having done so, companies will find that the benefits aren’t hard to see, the study suggests. The treasurer at a large chemicals/energy firm says simply that standardizing around a limited set of travel providers has “made it easier to negotiate preferred rates and evalu-ate spending trends.” Such steps will ultimately lead to better places. CFO

FIGURE 2

Better prices

68%

Better visibility into/control over employees’ travel behavior

39%

Better customer service

25%

Better selection of products

11%

Faster delivery

7%

Difficulty consolidating enough purchasing volume with a given vendor to gain negotiating leverage

30%

Difficulty enforcing employee compliance with travel-spending policies

30%

Lack of overall travel-purchasing volume

20%

Difficulty establishing relationships with vendors that employees are comfortable using

16%

The cost of documenting spending volume and negotiating concessions outweighs the benefits

16%

Lack of timely access to compre- hensive information on travel-relat- ed spending

15%

FIGURE 3

“ is among the top benefits my company has real-ized through preferred-vendor relation-ships for travel.”

“ is among the greatest barriers to my company’s ability to make better use of preferred-vendor relationships for travel-related purchases.”

0% 20 40 60 80%

0% 10 20 30 40%

Note: Respondents were asked to select up to two.

Note: Respondents were asked to select up to two.

HIS TAKE-AWAY: I spend about a third of my time on strategy questions. Right now we’re in a growth mode, so I’m

looking at where it will make the most sense to expand. We’re based in Michigan and we still have a third of our stores there, but now we’re in 16 states, and I anticipate we’ll be in more than 20 states in a few years. Should we open larger stores? His-torically, we’ve had stores as small as 7,000 square feet. By comparison, a Dick’s Sporting Goods store will usu-ally be 60,000 or 80,000 square feet. If you have a 10,000-square-foot store and Dick’s opens a 60,000-square-foot store right next to you, that pretty much wipes you out. But if we open bigger stores, we can hold our own. We won’t get the same rate of return on the dollar, but we can still get well beyond our hurdle rate and cost of capital, even if it costs a little more money up front. Going forward, the stores we are opening average 50,000-plus square feet.

INTERVIEW BY MARIELLE SEGARRA

TAKE AWAY

Courtesy of the Dunham’s Sports

The Game PlanNAME Al Blazek

POSITION CFO of Dunham’s Sports

PREVIOUS POSITIONS Director of sales and marketing finance at Whirlpool; director and divisional CFO at Circuit City.com; loss forecaster at Capitol One; manager of corporate finance at Wal-Mart; internal consultant for Columbia Energy Group

NOTABLE FOR His focus on strategy.

60 CFO | May 2013 | cfo.com

Dunham’s Sports CFO

Al Blazek

1316

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